UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended: December 31, 2014
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______________ to ______________
Commission File No.: 001-33710
CLEAN DIESEL TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
DelawareState or other jurisdiction of incorporation or organization |
06-1393453 (I.R.S. Employer Identification No.) |
1621 Fiske Place
Oxnard, CA 93033
(Address of principal executive offices) (Zip Code)
Registrants telephone number, including area code: (805) 639-9458
Securities registered pursuant to Section 12(b):
Title of each class |
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Name of each exchange on which registered |
Common Stock, $0.01 par value |
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The NASDAQ Stock Market LLC |
Securities registered pursuant to Section 12(g): None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in rule 405 of the Securities Act. Yes No X
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes No X
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No __
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes X No __
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrants knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. X
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
Large Accelerated filer ___ Accelerated filer ___ Non-accelerated filer ___ Smaller reporting company X
(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No X
The aggregate market value of the common equity held by non-affiliates of the registrant, computed by reference to the closing price as of the last business day of the registrants most recently completed second fiscal quarter, June 30, 2014, was $32,238,000. This calculation does not reflect a determination that persons are affiliates for any other purposes. The registrant does not have non-voting common stock outstanding.
As of March 5, 2015 , the outstanding number of shares of the registrants common stock, par value $0.01 per share, was 14,152,772 .
Documents incorporated by reference:
The registrant has incorporated by reference in Part III of this report on Form 10-K portions of its definitive Proxy Statement for the 2015 Annual Meeting of Stockholders to be filed with the Securities and Exchange Commission (SEC) within 120 days after the end of the registrants fiscal year.
CLEAN DIESEL TECHNOLOGIES, INC.
Annual Report on Form 10-K
For the Year Ended December 31, 2014
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CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, adopted pursuant to the Private Securities Litigation Reform Act of 1995. Forward-looking statements involve risks and uncertainties, as well as assumptions that could cause our results to differ materially from those expressed or implied by such forward-looking statements. Forward-looking statements generally are identified by the words may, will, project, might, expects, anticipates, believes, intends, estimates, should, could, would, strategy, plan, continue, pursue, or the negative of these words or other words or expressions of similar meaning. All statements, other than statements of historical fact, are statements that could be deemed forward-looking statements. These forward-looking statements are based on information available to us, are current only as of the date on which the statements are made, and are subject to numerous risks and uncertainties that could cause our actual results, performance, prospects or opportunities to differ materially from those expressed in, or implied by, the forward-looking statements. For a discussion of such risks and uncertainties, please see the discussion under the caption Risk Factors contained in this Annual Report on Form 10-K and in other information contained in this annual report and our publicly available filings with the SEC. You should not place undue reliance on any forward-looking statements. Except as otherwise required by federal securities laws, we undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, changed circumstances or any other reason.
EXPLANATORY NOTE
The terms CDTi or the Company or we, our and us means Clean Diesel Technologies, Inc. and its consolidated subsidiaries as of the date of this Annual Report on Form 10-K. References to Notes are notes included in the consolidated financial statements included in this Annual Report on Form 10-K.
TRADEMARKS
The Clean Diesel Technologies name with logo, CDT logo, CDTi name with logo, CSI ® , CATALYTIC SOLUTIONS ® , CSI logo, ARIS ® , BARETRAP ® , BMARS , CATTRAP ® , CDTI SPINEL , COMBICLEAN ® , COMBIFILTER ® , DESIGNED TO FIT. BUILT TO LAST. , DURAFIT , DURAFIT OEM REPLACEMENT EMISSION TECHNOLOGIES , MPC ® , OPTIMAL SPINEL , P2C , PATFLUID ® , PLATINUM PLUS ® , PURIFIER and design, PURIFILTER ® , PURIMUFFLER ® , SPGM , SPINEL , SPINEL PHASE , THREE-WAY ZPGM , TWO-WAY ZPGM , ZPGM , ZPGM TWC , TERMINOX ® and UNIKAT ® , among others, are registered or unregistered trademarks of Clean Diesel (including its subsidiaries).
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Company Overview
Our business is evolving from being a niche manufacturer of emissions control solutions for the automotive original equipment manufacturer (OEM), retrofit and aftermarket markets to becoming an advanced materials technology provider for these markets. Recently, we announced that testing was underway for our new Spinel technology, which is a family of proprietary materials incorporating various base metals that replace costly platinum group metals, or PGMs, and rare earth metals in coatings on vehicle catalytic converters. Once verified, we intend to commercialize our Spinel technology by supplying proprietary powders and/or licenses to other vehicle catalyst manufacturers as well as manufacturing catalysts for select customers in our existing facilities. We believe that this business model will allow us to achieve greater scale and higher return on our technology investment than in the past.
We currently commercialize our materials technology by manufacturing and distributing light duty vehicle catalysts and heavy duty diesel emissions control systems and products to major automakers, distributors, integrators and retrofitters. We have more than 14 years history of supplying catalysts to light duty vehicle OEMs and 35 years of experience in the heavy duty diesel systems market. We have a proven technical and manufacturing competence in the light duty vehicle catalyst market meeting auto makers stringent requirements for performance, quality and delivery. Our business is driven by increasingly stringent global emission standards for internal combustion engines, which are major sources of a variety of harmful pollutants. Since inception, we have developed a substantial portfolio of patents and related proprietary rights and extensive technological know-how. For additional information regarding our organizational history and key milestones, refer to the Company History discussion below.
We organize our operations in two business divisions: Catalyst and Heavy Duty Diesel Systems.
Catalyst. Utilizing our advanced materials technology platform, we develop and produce catalysts to reduce emissions from gasoline, diesel and natural gas combustion engines. Most catalytic systems require significant amounts of costly PGMs to operate efficiently. Using our proprietary mixed-phase catalyst, or MPC ® , technology, we have developed a family of unique high-performance catalysts, featuring inexpensive base-metals with low or even no PGM content. We expect that our new Spinel technology will enable further advances in catalyst performance and further reductions in PGM usage. Our technical and manufacturing capabilities have been established to meet automakers most stringent requirements. Since 2001, we have supplied over eleven million parts to light duty vehicle OEM customers. Our Catalyst division is also a supplier of products for our Heavy Duty Diesel Systems division.
Heavy Duty Diesel Systems. We specialize in the design and manufacture of verified exhaust emissions control solutions, and we offer a full range of products for the verified retrofit and non-retrofit OEM and aftermarket markets through our distribution/dealer network and direct sales. We believe we offer one of the industrys most comprehensive portfolios of emissions control systems for use in engine retrofit programs that have been evaluated and verified as compliant with applicable regulations by the United States, or U.S., Environmental Protection Agency, or EPA, and the California Air Resources Board, or CARB, as well as by regulators in several European countries. Recently, we launched our DuraFit OEM replacement diesel particulate filters, which leverage our proprietary catalyst technology within the medium and heavy duty vehicle parts replacement market, a new market segment for us. Sales of emissions control systems by our Heavy Duty Diesel Systems division are driven by the regulation of diesel emissions, particularly in the State of California.
Strategy
Our strategy is to transition from being a niche manufacturer of emissions control solutions for the automotive OEM, retrofit and aftermarket markets to becoming an advanced materials technology provider for these markets. In support of this strategy, we have filed a significant number of patents that underpin next-generation technology for our advanced low-PGM catalysts including synergized-PGM, or SPGM , as well as zero-PGM, or ZPGM , catalysts. We were recently awarded two significant patents for our new Spinel technology, a proprietary clean emissions exhaust platform aimed at improved catalytic performance, which we believe will dramatically reduce the cost of compliance with more stringent clean-air requirements. This is becoming increasingly relevant as new standards, such as the EPAs Tier 3, become effective and drive expected increases in the compliance costs of using PGMs with conventional formulation technology.
We are currently conducting vehicle testing to validate our Spinel technology for specific introductory products for global OEMs, with a goal of accelerating broad commercialization of this technology. Once validated, we intend to make it available to OEMs and other catalytic coaters for potential use in proprietary powder form and/or through licensing. We foresee multiple paths to market this technology to complement our existing business model.
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We plan to continue to maintain our current world-class manufacturing capability, and deploy it selectively where it adds value for our customers; to explore new joint ventures and partnerships; and to pursue new verticals. We intend to continue to evaluate and refine our strategic plan in order to seize opportunities as they arise.
Since 2013, we have filed nearly 100 patents pertaining to our advanced low-PGM and ZPGM catalysts. The development of our advanced low-PGM and ZPGM catalysts utilizing our Spinel technology and their commercialization is a strategic priority and will require investment in research, development, marketing and sales.
Emissions Control Industry Overview
Regulatory standards have been adopted worldwide to control the exhaust emissions from on- and off-road engines. These emissions typically include nitrogen oxides, hydrocarbons, particulate matter, carbon monoxide and more recently greenhouse gases such as carbon dioxide. Emission regulations for mobile sources have tightened and expanded over the years due to an increased understanding of the impacts of these emissions on human health and the environment, which is highlighted by the following:
· According to a March 2014 EPA report, over 149 million Americans today still experience unhealthy levels of air pollution which are linked to adverse health impacts such as hospital admissions, emergency room visits and premature mortality.
· In a 2014 State of the Air report prepared by the American Lung Association, it was documented that air pollution hovers at unhealthy levels in almost every major city, placing lives at risk. The same report indicated that cleaner diesel engines helped cut year-round particle pollution in many areas.
· According to a 2013 report published by the World Health Organization, exposure to particulate matter less than 2.5 micrometers in diameter (PM 2.5 ) reduces the life expectancy of each person in Europe by an average of 8.6 months.
Because standards put in place by the EPA, CARB, the European Union and other international regulators continue to become more restrictive, we view the market opportunities for our products as continually expanding, as our light duty vehicle catalyst products and heavy duty diesel emission control systems are designed specifically to deal with emissions from gasoline, diesel and a variety of alternative fuel powered engines.
Light Duty Vehicles
Key milestones in the evolution of light duty vehicle emissions control in the U.S. are summarized in the table below:
1970 |
Congress passed the Clean Air Act, which required a 90% reduction in emissions from new automobiles by 1975, and resulted in the introduction of the first generation two-way catalytic converter to remove carbon monoxide and hydrocarbon emissions. |
1977 |
Congress amended the Clean Air Act in order to further reduce the limits for nitrogen oxide emissions which resulted in the introduction of the three-way catalytic converter in 1981. |
1990 |
Amendments were made to the Clean Air Act to further reduce nitrogen oxide emission limits by another 40% beginning in 1994. These Tier 1 standards also resulted in standards for certain trucks. |
1998 |
The Clinton Administration, auto industry and Northeast States came to a voluntary agreement to implement the National Low Emissions Vehicles, or NLEV, which was fully implemented across the U.S. by 2001. Additionally, CARB adopted the Low Emission Vehicle II, or LEV II, program which was a predecessor to the EPAs Tier 2 standards set in 1999, which took effect in 2004. |
2014 |
The EPA announced their finalized Tier 3 standards, which are to be phased in between 2017 and 2025. These standards further reduce emissions from light duty vehicles by approximately 70% to 80% and are closely coordinated with the CARB LEV III standards. Of particular note, particulate matter standards are being further tightened to ensure that new advanced combustion strategies such as gasoline direct injection and diesel fueled vehicles do not pose additional new sources of pollution. |
Europe implemented similar regulations as those noted above under Euro III (effective 2000), Euro IV (effective 2005), Euro V (effective 2009) and Euro VI (effective 2014). Further, in various Asian countries, similar regulations have been implemented or will be implemented over the coming years.
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We currently supply our catalyst products featuring our proprietary MPC ® technology to OEMs such as Honda, whose 2014 Plug-in Hybrid Accord was approved by CARB as the first gasoline-powered car to meet what is known as the Super Ultra Low Emission Vehicle 20 (SULEV20) standard, the most stringent standard in the nation.
Heavy Duty Diesel Engines
Key milestones in the evolution of heavy duty diesel engine emissions control in the U.S. are summarized in the table below:
1985 |
The EPA first mandated emission standards for diesel-fueled trucks and buses. |
1991 - 2006 |
Emissions standards were largely met with advanced engine technologies. In approximately 375 engine certifications between 1994 and 2006, diesel oxidation catalysts were also used to help engines comply with particulate matter standards. |
2007 |
The EPA and CARB standards further reduced particulate matter emissions limits for heavy duty engines by an additional 90% which led to the introduction of catalyzed diesel particulate filters. |
2010 |
The California Truck and Bus Regulation mandated that all 1996 through 2006 diesel trucks in Class 7 (gross vehicle weight of 26,001-33,000 pounds) and Class 8 (gross vehicle weight greater than 33,000 pounds) be retrofitted with diesel particulate filters. Beyond California, several other states have subsequently adopted similar regulations. Also, nitrogen oxide emissions were reduced by an additional 83% which led to the introduction of selective catalytic reduction catalysts. |
Off-road compression ignition emissions standards (non-road Tier 1) were first set in 1996 and consistently phased in and further tightened by off-road Tier 2 and Tier 3 emissions limits. Tier 4 emissions limits which have been phased in between 2011 and 2014 saw the first introduction of various exhaust emissions controls including diesel oxidation catalysts, diesel particulate filters and selective catalytic reduction catalysts. Given the global nature of the off-road diesel powered equipment market, common EPA and European Union standards have typically been enacted at comparable times.
Government Programs
Governments continue to issue increasingly stringent diesel emission control regulations and mandates. Increased compliance with these regulatory initiatives drives demand for our products and the timing of implementation for emission reduction projects. Funding mechanisms are evolving which involve government and private sector funding of emission control projects, including the following key programs:
· National Clean Diesel Campaign . Established by the EPA, this program promotes diesel emission reduction strategies and oversees regulatory programs that address new diesel engines as well as other innovative programs to address the millions of diesel engines already in use. In the U.S., heavy duty diesel retrofits have been driven primarily by subsidy programs supported under the Diesel Emissions Reduction Act, or DERA, the American Recovery and Reconstruction Act, or ARRA, Proposition 1B in California, the U.S. Department of Transportations Congestion Mitigation and Air Quality Improvement program, or CMAQ, as well as various other state and local programs.
· CMAQ Program . This program provides a flexible funding source to state and local governments for transportation projects and programs to help meet the requirements of the Clean Air Act. Over $2.2 billion in funding was authorized for 2013 and 2014 to reduce congestion and improve air quality for areas that do not meet the National Ambient Air Quality Standards (NAAQS) for ozone, carbon monoxide or particulate matter (nonattainment areas) and for former nonattainment areas that are now in compliance (maintenance areas).
· International Programs . London implemented a stricter low emission zones, or LEZs, regulations, which went into effect in early 2012, resulted in the successful retrofit of an estimated 17,000 heavy duty diesel vehicles during 2011 and early 2012. We believe that our emission reduction systems were used to retrofit approximately 20% of those vehicles. Further, we believe that countries will likely follow Europe and the United States in passing more stringent regulations, funding retrofit programs, and establishing LEZs. For example, countries such as Chile, Columbia, Brazil, China and Israel are leading the way with urban bus retrofit programs. We estimate over 50,000 urban buses and trucks could be retrofitted by 2016 in major metropolitan areas within these countries with the potential for major follow-on LEZ programs and on-road mandates.
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Emerging Replacement Market in North America
According to market analysis firm Power System Research, manufacturers in North America have produced an average 250,000 heavy duty on-road diesel vehicles equipped with a diesel particulate filter each year since 2007 to comply with EPA requirements. The typical OEM warranty on diesel particulate filters is five years and has expired for many of these vehicles with more continuing to expire in the coming years. As 2007 and newer diesel particulate filters from OEMs fail and require replacement, non-OEM diesel particulate filters will be needed as replacements. According to a 2012 industry report, the market for medium and heavy duty vehicle after-treatment maintenance and repair is projected to grow from $0.5 billion in 2010 to $3.0 billion by 2017. In the second quarter of 2014, we introduced the CDTi manufactured DuraFit OEM replacement diesel particulate filters through our channel of distributors to provide an alternative to OEM manufactured parts. We expect to leverage our existing technology and know-how to cost effectively serve this emerging market.
Technology
We have succeeded in developing a world-class technology portfolio to meet and exceed regulatory emission standards around the globe. In particular, our Spinel , MPC ® and Platinum Plus ® fuel-borne catalyst technologies, as well as our diesel particulate filter and selective catalytic reduction system design and packaging know-how, are at the core of our business.
· Spinel . Our Spinel technology is a unique clean emissions exhaust technology which we believe will dramatically reduce the cost of attaining more stringent clean air standards. Spinel was the name initially given to naturally-occurring magnesium aluminate (MgAI2O4) and is now used to describe any composition with the same structure. Our Spinel technology may employ numerous low-cost metals in the spinel structure enabling use in a wide range of engine and vehicle applications, both gasoline and diesel, as well as other potential vertical markets. Our unique Spinel technology utilizes various base metals, which when combined together in a common structure, achieve unusual and very effective catalytic conversion activity. Spinel technology is ideal for the coating of catalytic converters an alternative to those utilizing costly PGMs and rare earth materials. The base metals we use are common and inexpensive compared to PGMs, such as platinum, palladium and rhodium, and rare earth metals, like cerium, lanthanum and neodymium. We believe Spinel technology will provide significant cost savings over conventional coating formulations. In addition, the Spinel technology structure is extremely versatile and stable. The versatility is critical for optimizing future generations of products to meet changing catalytic conversion needs for rapidly evolving engine technologies and increasingly stringent clean air standards. The stability is critical to provide superior catalytic performance over time and at extreme temperatures for lifetime durability. In addition to SPGM and ZPGM catalysts, we currently have oxygen storage material, or OSM, under development which synergizes PGM function and drives the critical vehicle on-board diagnostic system. Our newest family of advanced low-PGM and ZPGM oxide compounds based upon our Spinel technology is summarized below:
To date, we have filed numerous patents on our Spinel technology and two were recently issued. While not yet available, we are well underway with testing Spinel technology on production models of popular passenger cars and heavy duty diesel vehicles at independent vehicle test facilities.
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· MPC ® . We have developed and patented intellectual property rights to a novel technology for creating and manufacturing catalysts known as mixed phase catalysts (MPC ® ). This technology involves the self-assembly of a ceramic oxide matrix with catalytic metals precisely positioned within three-dimensional structures. The MPC ® design gives our catalyst products two critical attributes that we believe differentiate them from competing offerings: superior stability that allows heat resistance and high performance with very low levels of precious metals; and base metal activation that allows base metals to be used instead of costly PGMs without compromising catalytic performance. The stability platform will continue to be important in the context of the new ZPGM materials. The design methodology of sintering resistance will continue to be a key focus as we integrate the new materials with full catalyst design strategies.
· Platinum Plus ® . We have developed and patented our Platinum Plus ® fuel-borne catalyst as a diesel fuel soluble additive, which contains minute amounts of organo-metallic platinum and cerium catalysts. Platinum Plus ® enables rapid conversion of particulate matter from diesel engines when coupled with a diesel particulate filter. It also improves combustion, which acts to reduce engine-out emissions. Platinum Plus ® fuel-borne catalyst lends itself to a wide range of enabling solutions including diesel particulate filtration, low emission biodiesel, carbon reduction and exhaust emission reduction. Environmentally conscious corporations and fleets can utilize this solution to voluntarily reduce emissions.
· ARIS ® . We have developed technology for selective catalytic reduction using urea, which is a highly effective method of reducing oxides of nitrogen. ARIS ® technology forms a key part of the selective catalytic reduction system and is an advanced, computer-controlled, reagent injection system. Our ARIS ® technology applies to single-fluid systems, methods of control and the combination of selective catalytic reduction with exhaust gas recirculation technology. It covers a concept for injecting urea into the engine exhaust where it reacts across a catalyst to reduce oxides of nitrogen and water vapor. ARIS ® technology also provides reliable hydrocarbon (HC) injection into the exhaust stream for applications including lean NOx traps, reformer systems and diesel particulate filter active regeneration. Effective heat removal and reliable, trouble-free fuel injection for durable exhaust emissions systems performance is a paramount consideration for designing OEM and retrofit solutions. Our patented ARIS ® for selective catalytic reduction reduces nitrogen oxide by up to 90%. We have numerous U.S. and corresponding international patents on the use of ARIS ® technology.
· Exhaust Gas Recirculation and Selective Catalytic Reduction. Exhaust Gas Recirculation, or EGR, and Selective Catalytic Reduction, or SCR, are technologies developed in the global transportation industry by manufacturers of diesel powered equipment in order to meet the standards of oxides of nitrogen emissions defined by the EPA and other global environmental regulation agencies. In 1997, we developed and patented the concept of combined use of EGR and SCR to minimize emissions and take advantage of the benefits each can bring in terms of oxides of nitrogen reduction. As legislation tightens across the globe, we believe EGR in combination with SCR is a key solution to meet strict oxides of nitrogen regulations. Previously seen as competing approaches, combined EGR/SCR allows users to meet strict oxides of nitrogen levels outlined by the U.S. 2010 and Euro 6/VI emission standards. The EGR system can be activated to reduce oxides of nitrogen when starting a cold engine. The SCR operates at a higher temperature when the catalyst is fully active and at low EGR rates. With both EGR and SCR in place, engines can be fine-tuned to optimize fuel efficiency and deliver greater emissions reduction. We have intellectual property holdings for the design and implementation of these combination systems and have licensed these patents to several industry providers.
We protect our proprietary technologies, along with our other intellectual property, through the use of patents, trade secrets and registered and common law trademarks. For additional information, refer to the Intellectual Property discussion below.
Competitive Advantages
Through persistent technology development, we maintain a broad portfolio of emission control products ranging from catalysts to complete retrofit or OEM systems. We believe that our technologies and products represent a fundamentally different solution, and the following competitive strengths position us as a leading provider of emission control products and systems.
· Superior Catalyst Performance . Our proprietary technology enables us to produce catalytic coatings capable of significantly better catalytic performance than those previously available. We have achieved this demonstrated performance advantage by creating catalysts using unique nanostructures with superior stability under prolonged exposure to high temperatures. As a result, in heavy duty diesel and automotive applications, our catalyst formulations are able to maintain high levels of performance over time using substantially lower or zeroPGMs than products previously available.
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Products
Catalyst Division
Our Catalyst division currently produces catalyst formulations for gasoline, diesel and natural gas induced emissions that offer superior performance, proven durability and cost effectiveness for multiple markets and a wide range of applications. The Catalyst division products include catalysts for gasoline (light duty vehicle) engines, diesel engines and for energy applications, as further discussed below:
Gasoline Engines |
We believe catalytic converters using our technology have superior catalytic performance, can cost substantially less as a result of significantly reduced PGM or zero-PGM loadings, have comparable or better durability and are physically and operationally compatible with all existing manufacturing processes and operating requirements. Our solution is based on industry-leading, patent-protected technology and a scalable manufacturing business model. |
Diesel Engines |
Current techniques for diesel engines to meet emissions standards require the use of several methods, including diesel oxidation catalysts, catalyzed diesel particulate filters and selective catalytic reduction systems. We offer a full range of catalyst products for the control of carbon monoxide, hydrocarbons, particulate matter and nitrogen oxide in light and heavy duty applications. |
Energy Applications |
We have developed and can manufacture catalysts for use in selective catalytic reduction and carbon monoxide reduction systems, which are used to reduce nitrogen oxide and carbon monoxide emissions from natural gas and petroleum gas burning utility plants, industrial process plants, OEMs, refineries, food processors, product manufacturers and universities. |
Our unique advanced materials technology provides a number of potential vertical market opportunities for us that we are focused on pursuing. These opportunities arise from our ability to reduce the use of PGMs and even eliminate the PGM content. Other than the emission reduction market, we believe that the fuel cells market, petrochemicals catalyst market and the thermoelectric market may provide us the opportunity to use our advanced materials technology to develop and sell or license products.
In addition to the portfolio of products already developed from our proprietary MPC ® technology platform, we have a pipeline of new products under development based upon our new Spinel technology platform. We are working on the next generation of our current product offerings and in growing the portfolio of advanced low-PGM and ZPGM products and verified technologies.
Heavy Duty Diesel Systems Division
Our Heavy Duty Diesel Systems division offers a full range of products globally for OEM and verified retrofit markets for the reduction of exhaust emissions of on-road, off-road and stationary diesel and alternative fuel engines including propane and natural gas. These division products include:
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Sales and Marketing
The catalyst industry is mainly comprised of a few suppliers serving large, sophisticated customers such as automobile manufacturers. Purchase cycles for catalysts tend to be long, resulting in generally predictable and stable revenue streams. Catalysts are technology intensive products that have a profound effect on the performance of the large, expensive systems in which they are embedded. Extensive interaction is required between catalyst manufacturers and their customers in the course of developing an effective, reliable catalyst for a particular application. For this reason it would appear that even the largest customers prefer to work with only two or three preferred catalyst suppliers on a specific application. The collaboration required for catalyst development and the technical hurdles involved in making effective and reliable catalysts create barriers to entry and provide an opportunity for catalyst manufacturers to earn attractive margins. We are an approved supplier of catalysts for major automotive manufacturers, such as Honda. In addition, the Catalyst division targets large heavy duty diesel engine manufacturers as potential buyers of our catalyst products and explores potential vertical markets for utilization of our technologies. Our Heavy Duty Diesel Systems division is also a customer of our catalyst products.
A significant portion of Catalyst division sales to external customers in 2014 and 2013 were made to Honda. Sales to Honda represented 98% and 95% of Catalyst division revenues and 52% and 41% of consolidated revenues for the years ended December 31, 2014 and 2013, respectively. A significant loss in sales to Honda could have a material adverse effect on our business.
We sell our heavy duty diesel system products to customers worldwide through a large network of dealers and distributors, as well as directly to OEM customers. The dealers and distributors receive a discount from list price or a commission, which varies depending on the product sold. Customers purchase heavy duty diesel system products to reduce emissions for either retrofit or OEM applications. Retrofit applications generally involve funded projects that use approved systems that are one-off in nature. Typical retrofit end-user customers include school districts, municipalities and other fleet operators, and the market for our heavy duty diesel systems products is heavily influenced by government funding of emissions control projects. OEM customers include manufacturers of heavy duty diesel equipment, such as mining equipment, vehicles, generator sets and construction equipment. Recently, we launched our DuraFit OEM replacement diesel particulate filters, which leverage our proprietary catalyst technology within the medium and heavy duty vehicle parts replacement market, a new market segment for us. We expect that showcasing DuraFit at industry tradeshows, advertising in industry publications and creating a website dedicated to DuraFit will allow us to quickly grow the distribution reach and market acceptance of this new product. Adoption and implementation of diesel emission control regulations drives demand for our products.
Our total backlog of confirmed orders was approximately $6.6 million at December 31, 2014 and $6.3 million at December 31, 2013. We expect to fulfill the confirmed orders as of December 31, 2014 during 2015.
We also have an investment in TC Catalyst, Inc. (TCC), an entity that manufactures and distributes catalysts in the Asia-Pacific territories including, among other countries, China, Japan and South Korea. In 2008 and 2009, we sold and transferred specific heavy duty catalyst and three-way catalyst technology and intellectual property for use in certain countries in Asia (the Territory) to our investment partner in TCC, Tanaka Holdings Co., Ltd. (formerly Tanaka Holdings K.K.), a Japanese company, which together with its subsidiary Tanaka Kikinzoku Kogyo K.K., is referred to herein as TKK, who agreed to provide certain of that intellectual property to TCC on a royalty-free basis. Recently, we further amended our agreements with TKK and TCC to, among other things, enable us to sell certain products and technology in the Territory pursuant to royalty arrangements. For additional information, refer to Note 15, Equity Investments.
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Competition
Our company operates in two market segments, with two different competitive landscapes.
Catalyst . The catalyst industry is highly concentrated with a few major competitors as a result of continuing consolidation through acquisitions. The major competitors are diversified enterprises with catalysts representing one of several lines of business. Our Catalyst division competes directly against BASF GmbH, Johnson Matthey plc and Umicore Limited Liability Company. In the worldwide market the key competitive factors are:
· Ability to provide a solution that satisfies emission reduction regulations;
· Total cost of product (inclusive of PGM);
· Ability to transition new products from development to production;
· Quality control that guarantees 100% compliance with specifications;
· On-time delivery to support customer production requirements; and
· Financial stability and global reach.
We believe that our advanced low-PGM catalyst technology and our history of quality and service enable us to compete in some cases despite our lack of financial stability and size. Our strategy of transitioning to an advanced materials company is intended to enable broad commercialization of our technology without the need for a global manufacturing footprint.
Heavy Duty Diesel Systems . Our Heavy Duty Diesel Systems division competes directly against other companies that market verified products. In North America, our key competitors with verified products include: Donaldson Company, Inc., ESW, Inc., Hug Filtersystems, Johnson Matthey plc and DCL International Inc. In Europe, we compete with a number of companies, including Dinex Exhausts Ltd, Eminox Ltd, Huss Group and HJS Emission Technology. Key competitive factors are:
· Having a broad portfolio of verified products;
· Performance track record with dealers, distributors and end-use customers; and
· Ability to provide cost effective innovative solutions.
We believe that we are very competitive on all key criteria with other companies in this marketplace.
Research and Development .
Our research and development in catalyst technology is our core strength and has resulted in a broad array of products for the light duty vehicle and heavy duty diesel markets. Our greatest strength in the catalyst business lies in the technical sophistication and cost-to-performance ratio of our products. Product development in our Heavy Duty Diesel Systems division has resulted in a broad family of verified products and systems. We credit our accomplishments to strong engineering capabilities, an experienced team, streamlined product development processes and solid experience in the verification and approval process. We seek to acquire competitive advantage through the use of customized catalysts for our emission control systems. We spent approximately $6.5 million and $4.7 million on research and development activities in the years ended December 31, 2014 and 2013, respectively.
Intellectual Property
Our intellectual property includes patent rights, trade secrets and registered and common law trademarks. Historically, we have primarily protected our intellectual property, particularly in the area of three-way catalysts (and particularly in the automotive area) by maintaining our innovative technology as trade secrets. We believe that the protection provided by trade secrets for our intellectual property was the most suitable protection available for the automotive industry where our business initially started and in which we currently sell our commercial products. Our automotive competitors largely rely on trade secret protection for their innovative technology.
In order to more broadly commercialize our technology in new business models, we have sought patent protection in relation to any new industries and new countries in which we expect to do business. We currently have approximately 170 issued patents and approximately 150 pending applications covering the following main technologies: fundamental catalyst formulations based on perovskite mixed metal oxides applicable to all catalyst markets, Spinel technology, Mixed Phase Catalyst (MPC ® ) technology, PGM-free catalyzed diesel particulate filter, selective catalytic reduction, diesel oxidation catalyst, ZPGM three-way catalyst formulations, ZPGM diesel oxidation catalyst, palladium three-way catalyst formulations, fuel-borne catalysts, optimization and stabilization of oxygen storage materials without rare earth materials, exhaust gas recirculation with selective catalytic reduction and exhaust systems for diesel engines incorporating particulate filters. Currently, our patents have expiration dates ranging from 2015 through 2032.
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We have conducted an analysis of our technologies and intellectual property and have decided to aggressively patent our important technologies going forward. While we continue to rely on a combination of trade secrets, know-how, trademark registrations, confidentiality and other agreements with employees, customers, partners and others, we intend to strengthen our position through the prosecution of patents to protect our intellectual property rights pertaining to our products and technology.
We currently have registered and unregistered trademarks for the Clean Diesel Technologies name with logo, CDT logo, CDTi name with logo, CSI ® , CATALYTIC SOLUTIONS ® , CSI logo, ARIS ® , BARETRAP ® , BMARS , CATTRAP ® , CDTI SPINEL , COMBICLEAN ® , COMBIFILTER ® , DESIGNED TO FIT. BUILT TO LAST. , DURAFIT , DURAFIT OEM REPLACEMENT EMISSION TECHNOLOGIES , MPC ® , OPTIMAL SPINEL , P2C , PATFLUID ® , PLATINUM PLUS ® , PURIFIER and design, PURIFILTER ® , PURIMUFFLER ® , SPGM , SPINEL , SPINEL PHASE , THREE-WAY ZPGM , TWO-WAY ZPGM , ZPGM , ZPGM TWC , TERMINOX ® and UNIKAT ® .
Manufacturing Operations
Our Catalyst division has developed an innovative and sophisticated manufacturing process for coating substrates using our MPC ® catalytic coatings. The manufacturing process consists of mixing specially formulated catalytic coatings, applying the coatings to ceramic substrates, firing the coated substrates in a furnace, then repeating this process one or two more times. The process of mixing and applying the various types of coatings onto high cell density substrates is complex and requires sophisticated manufacturing technology. We have been manufacturing automotive catalysts since 1999. Our manufacturing lines are designed to provide a high level of quality control at every step of the unique manufacturing process. We manufacture our proprietary catalyst products in our manufacturing facility in Oxnard, California.
Our Heavy Duty Diesel Systems division engineers our emissions control products to customer-specific applications. We believe that this approach reduces installation or assembly time and optimizes operating uptime. Our Heavy Duty Diesel Systems division works as the customers partner to deliver custom, industry-leading solutions that address each customers particular environmental mandates. Our heavy duty diesel systems are designed and manufactured in facilities located in Thornhill, Ontario and Malmö, Sweden.
We maintain ISO 9001:2008, ISO/TS 16949:2009 and ISO 14001:2004 certifications.
Our raw material requirements vary by division. Our Catalyst division purchases ceramic substrates that we coat with specialty formulated catalysts comprised of PGMs and various chemicals. PGMs are either provided on a consignment basis by the customers of the division or are purchased by us on behalf of the customer. Our Heavy Duty Diesel Systems division purchases filters, filters coated with catalysts and other materials to manufacture our emission systems. These raw materials are purchased from third party suppliers as well as internally from our Catalyst division. For the Catalyst division, the availability of raw materials is generally dictated by global market supply of key materials. Key materials such as rare earth metals and platinum group metals have at times had delivery constricted due to global supply constraints. The ceramic substrates that we buy are generally sourced by our automotive OEM customers and adequate supply is generally available. The filters for our Heavy Duty Diesel division can generally be purchased from more than one source, limiting our risk of supply, and coated filters, can be sourced from either our Catalyst division or outside suppliers, though changing suppliers for some catalysts may require regulatory approval. For further discussion of risk of supply, refer to Item 1.A. Risk Factors Failure of one or more key suppliers to timely deliver could prevent, delay or limit us from supplying products. Delays in delivery times for PGM purchases could also result in losses due to fluctuations in prices. Delays in the delivery times and the cost impact of the world-wide shortage of rare earth metals could delay us from supplying products and could result in lower profits.
Regulations
We are committed to complying with all federal, state and international environmental laws governing production, use, transport and disposal of substances and control of emissions. In addition to governing our manufacturing and other operations, these laws often impact the development of our emissions control products, including, but not limited to, required compliance with emissions standards applicable to new product diesel, gasoline and alternative fuel engines. These regulations include those developed in Japan, in the United States by the EPA and CARB and in the E.U. by the European Environment Agency, including standards from the Verification of Emission Reduction Technologies, or VERT, Association.
Many of our products must receive regulatory approval prior to sale. In the United States, regulatory approval is obtained from the EPA or CARB through a verification process. The verification process includes a thorough review of the technology as well as tightly controlled testing to quantify statistically significant levels of emission reductions. For example, the EPA verification process begins with a verification application and a test plan. Once this is completed, the testing phase begins and is then followed by a data analysis to determine if the technology qualifies for verification. Once a technology is placed on the verified technologies list and 500 units are sold, the manufacturer is responsible for conducting in-use testing and reporting of results to the EPA. Similar product approval schemes exist in other countries around the world.
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Company History
We are a Delaware corporation formed in 1994 as a wholly-owned subsidiary of Fuel Tech, Inc., a Delaware corporation (formerly known as Fuel-Tech N.V., a Netherlands Antilles limited liability company) (Fuel Tech), and were spun off by Fuel Tech in a rights offering in December 1995 on the NASDAQ Stock Market (Symbol CDTI). On October 15, 2010, we completed a business combination with Catalytic Solutions, Inc. (CSI), a California corporation formed in 1996, when our wholly-owned subsidiary, CDTI Merger Sub, Inc., merged with and into CSI. We refer to this transaction as the Merger. The Merger was accounted for as a reverse acquisition and, as a result, our Companys (the legal acquirer) consolidated financial statements are now those of CSI (the accounting acquirer), with the assets, liabilities, revenues and expenses of CDTI being included effective from October 15, 2010, the closing date of the Merger. From November 22, 2006 through the closing date of the Merger, CSIs common stock was listed on the AIM of the London Stock Exchange (AIM: CTS and CTSU).
Employees
As of December 31, 2014, we had 113 full time employees and 4 part time employees. None of our employees is a party to a collective bargaining agreement. We also retain outside consultants and sales and marketing consultants and agents.
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We are subject to risks and uncertainties that may affect our future financial performance and our stock price. Some of the risks and uncertainties that may cause our financial performance to vary or that may materially or adversely affect our financial performance or st ock price are discussed below. Any of these risks, as well as other risks and uncertainties not known to us or that we believe to be immaterial, could harm our financial condition, results of operations or cash flows. You should carefully consider the risks described below in addition to the cautionary statements and risk factors described elsewhere and the other information contained in this Annual report on Form 10-K and in our other filings with the SEC, including subsequent reports on Forms 10-K, 10-Q and 8-K, before deciding to purchase, hold, or sell our stock.
Risks Related to Our Financial Condition
We have incurred losses and have not experienced positive cash flows from operations in the past, and our independent registered public accounting firm expressed substantial doubt about our ability to continue as a going concern in their reports on our financial statements for the periods ended December 31, 2014 and 2013. Our ability to achieve profitability and positive cash flows from operations, or finance negative cash flows from operations, could depend on reductions in our operating costs, which may not be achievable, or from increased sales, which may not occur.
We have suffered losses from operations since inception, and we had accumulated deficits of $191.1 million and $181.7 million as of December 31, 2014 and 2013, respectively. Additionally, we have historically operated with negative cash flows from operations. We had operating cash flow deficits of $9.9 million and $0.4 million for the years ended December 31, 2014 and 2013, respectively. Although we may identify areas where economies can be effected, whether or not we will be successful in realizing these cost-savings, as well as when we are able to effect these economies and the overall restructuring costs we may incur cannot be known at this time. In addition, while we have identified revenue opportunities that if realized would positively affect our cash flows, there is no assurance that such opportunities will be realized. All of these will be important factors in determining whether we will have sufficient cash resources available to maintain our operations for any appreciable length of time or seek to implement our business strategies, including with respect to the development, patent protection and commercialization of advanced low- and zero-platinum group metal, or ZPGM , technologies. In the event that we are unable to generate revenues or raise additional funds, we may be required to delay, reduce or severely curtail our operations or the implementation of our business strategies or otherwise impede our on-going business efforts, which could have a material adverse effect on our business, operating results, financial condition and long-term prospects.
We could require additional working capital to maintain our operations in the form of funding from outside sources which may be limited, difficult to obtain, or unavailable on acceptable terms or not available at all, or in the case of an offering of common stock or securities convertible into or exercisable for common stock, may result in dilution to our existing stockholders
We have historically relied on outside sources of funding in the form of debt or equity. Although we have a demand credit facility backed by our receivables and inventory, there is no guarantee that we will be able to borrow to the full limit of $7.5 million if the lender chooses not to finance a portion of our receivables or inventory. Additionally, the lender may terminate the facility at any time. We were successful in raising net proceeds of $9.9 million through public offerings of shares during 2014 but there is no guarantee that should the need arise, we will be able to do so again.
Any required additional funding may be in the form of debt financing or a private or public offering of equity securities. We believe that debt financing would be difficult to obtain because of our limited assets and cash flows as well as current general economic conditions. Any additional offering of shares of our common stock or of securities exercisable for or convertible into shares of our common stock may result in further dilution to our existing stockholders. Our ability to consummate a financing will depend not only on our ability to achieve positive operating results, but also on conditions then prevailing in the relevant capital markets. There can be no assurance that such funding will be available if needed, or on acceptable terms. In the event that we are unable to raise such funds, we may be required to delay, reduce or severely curtail our operations or the implementation of our business strategies or otherwise impede our on-going business efforts, which could have a material adverse effect on our business, operating results, financial condition and long-term prospects.
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Future growth of our business depends, in part, on the general availability of funding for emissions control programs, as well as enforcement of existing emissions-related environmental regulations and further tightening of emission standards worldwide.
Future growth of our business depends in part on the general availability of funding for emissions control programs, which can be affected for economic as well as political reasons. For example, in light of the recent budget crisis in California, funding was not available for a state-funded emissions control project for off-road diesel equipment, and thus, its start date was pushed back. Additionally, funding for the EPAs Diesel Emissions Reductions Act, or DERA, for 2014 has been substantially reduced from historic levels, and future funding remains uncertain as budget discussions continue to be debated in the U.S. Congress. Funding under the U.S. Congestion Mitigation and Air Quality program, or CMAQ, can be used by states for a variety of emission reduction programs including purchase of new vehicles, building high occupancy travel lanes (car-pool lanes) and retrofit programs. To the extent that these funds are not used for retrofit programs, it limits our sales opportunities. Funding for these types of emissions control projects drives demand for our products. If such funding is not available, it can negatively affect our future growth prospects. In addition to funding, we also expect that our future business growth will be driven, in part, by the enforcement of existing emissions-related environmental regulations and tightening of emissions standards worldwide. If such standards do not continue to become stricter or are loosened or are not enforced by governmental authorities due to commercial and business pressure or otherwise, it could have a material adverse effect on our business, operating results, financial condition and long-term prospects.
The pursuit of opportunities relating to special government mandated retrofit programs requires cash investment in operating expenses and working capital such as inventory and receivables prior to the realization of profits and cash from sales and, if we are not successful in accessing cash resources to make these investments, we may miss out on these opportunities; further, if we are not successful in generating sufficient sales from these opportunities, we will not realize the benefits of the investments in inventory, which could have an adverse effect on our business, financial condition and results of operations.
We are pursuing revenue generating opportunities relating to special government mandated retrofit programs such as those in California and potentially others in various jurisdictions in North America, Europe and Asia. Opportunities such as these require cash investment in operating expenses and working capital such as inventory and receivables prior to realizing profits and cash from sales. If we are not successful in accessing cash resources to make these investments, we may miss out on these opportunities. Further, if we are not successful in generating sufficient sales from these opportunities, we will not realize the benefits of the investments in inventory, which would have an adverse effect on our business, financial condition and results of operations.
If we fail to maintain an effective system of internal control over financial reporting, we may not be able to accurately report our financial results, which will likely result in significant legal and accounting expense and diversion of management resources, and current and potential stockholders may lose confidence in our financial reporting and the market price of our stock will likely decline.
We are required by the SEC to establish and maintain adequate internal control over financial reporting that provides reasonable assurance regarding the reliability of our financial reporting and the preparation of financial statements in accordance with generally accepted accounting principles. We are likewise required, on a quarterly basis, to evaluate the effectiveness of our internal controls and to disclose any changes and material weaknesses in those internal controls.
Any failure to maintain internal controls could adversely affect our ability to report our financial results on a timely and accurate basis. If our financial statements are not accurate, investors may not have a complete understanding of our operations. If we do not file our financial statements on a timely basis as required by the SEC and The NASDAQ Capital Market, we could face negative consequences from those authorities. In either case, there could be a material adverse effect on our business. Inferior internal controls could also cause investors to lose confidence in our reported financial information, which could have a negative effect on the trading price of our common stock. We can give no assurance that material weaknesses or restatements of financial results will not arise in the future due to a failure to implement and maintain adequate internal control over financial reporting or circumvention of these controls. In addition, in the future our controls and procedures may no longer be adequate to prevent or identify irregularities or errors or to facilitate the fair presentation of our consolidated financial statements. Responding to inquiries from the SEC or The NASDAQ Capital Market, regardless of the outcome, are likely to consume a significant amount of our management resources and cause us to incur significant legal and accounting expense. Further, many companies that have restated their historical financial statements have experienced a decline in stock price and related stockholder lawsuits.
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The Merger adversely affects our ability to take advantage of the significant U.S. federal tax loss carryforwards and tax credits accumulated.
In connection with the Merger, we performed a study to evaluate the status of net operating loss carryforwards. Because the Merger caused an ownership change (as defined for U.S. federal income tax purposes), our ability to use our net operating losses and credits in future tax years has been significantly limited. In addition, due to the ownership change, our federal research and development credits have also been limited and, consequently, we do not anticipate being able to use any of these credits that existed as of the date of the Merger in future tax years. Our limited ability to use these net operating losses and tax credits as a result of the Merger or otherwise, including as a result of equity offerings subsequent to the Merger, could have an adverse effect on our results of operations.
Foreign currency fluctuations could impact financial performance.
Because of our activities in the United Kingdom, Europe, Canada and Asia, we are exposed to fluctuations in foreign currency rates. We may manage the risk to such exposure by entering into foreign currency futures and option contracts of which there were none in 2014 or 2013. Foreign currency fluctuations may have a significant effect on our operations in the future.
Risks Related to Our Business
Historically, we have been dependent on a few major customers, particularly Honda, for a significant portion of our revenue and our revenue would decline if we are unable to maintain those relationships, if customers reduce their orders for our products, or if we are unable to secure new customers. In addition, we have an expired agreement with Honda that may limit our rights to commercialize certain technology within the scope of that agreement and adversely affect our technology licensing strategy.
Historically, we have derived a significant portion of our revenue from a limited number of customers. For example, sales to Honda represented 98% and 95% of Catalyst division revenues and 52% and 41% of consolidated revenues for the years ended December 31, 2014 and 2013, respectively. While we continually seek to broaden our customer base, it is likely that for the foreseeable future we will remain dependent on Honda to represent a substantial portion of our revenue. Manufacturers typically seek to have two or more sources of critical components; however, there can be no assurance that manufacturers for which we are a shared supplier will not sole source the products we supply. Once our product is designed into a vehicle model, we generally supply our component for the life of that model. There can be no assurance, however, that our customers will retain us for a full model term. In this regard, relationships with our customers are based on purchase orders rather than long-term formal supply agreements and customers can discontinue or materially reduce orders without warning or penalty. In addition, while new models tend to remain relatively stable for a few years, there can be no assurance that manufacturers will not change models more rapidly, or change the performance requirements of components used in those models, and use other suppliers for these new or revised models. Demand for our products is tied directly to demand for vehicles. Accordingly, factors that affect the truck and automobile markets have a direct effect on our business, including factors outside of our control, such as vehicle sales slowdowns due to economic concerns, or as a result of natural disasters, including earthquakes and/or tsunamis. The loss of one or more of our significant customers, or reduced demand from one or more of our significant customers, particularly Honda, would have an adverse effect on our revenue, and could affect our ability to become profitable or continue our business operations.
In conjunction with our longstanding relationship with Honda, we entered into a joint research agreement with the motorcycle division of Honda regarding the development of ZPGM catalysts for motorcycles. The agreement was signed in 2010, extended in 2012 and expired in March 2014, although confidentiality provisions continue to survive. The agreement provides that technology within the scope of the agreement developed solely by one party is owned by that party, and that technology within the scope of the agreement that is jointly developed by both parties is jointly owned. The parties are in the process of assessing what technology, if any, developed during the term of the agreement is jointly owned. While we believe that core technology within the scope of the agreement was developed solely by us, there can be no assurance that our belief will not be challenged or invalidated. To the extent that Honda is a joint owner of critical technology developed under the agreement, Honda (including its automotive division) might not be required to pay us a license or royalty fee for use of the jointly owned technology; Honda may be able to manufacture its own catalysts based on the jointly owned technology; and Honda may be able to license the jointly owned technology to others without our consent. In addition, under the terms of the agreement, we may not be able to license jointly owned technology to others without Hondas consent. Our inability to license jointly owned technology to others could adversely affect our technology licensing strategy. Further, as noted above, we do not have long-term supply agreements with Honda, and accordingly, Honda could terminate its relationship with us at any time for any reason.
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We cannot assure you that we will be successful in our transition into an advanced materials supplier or that those efforts will have the intended effect of increasing profitability.
We are taking action to transform CDTi from a niche manufacturing company that makes emission control products, to an advanced materials company that develops proprietary technology and more broadly commercializes it through other major players in the key value chains, such as global OEMs and coaters in the case of automotive catalysts. In addition, we plan to continue to manufacture certain products for select OEMs to demonstrate the value of the technology, to remain on the cutting edge in formulation and manufacturing know-how and to drive next-generation developments in our enabling technology. We also plan to pursue attractive specialized markets like heavy-duty replacement parts, where we leverage our catalyst materials technology and our track history in heavy-duty diesel. We believe that by emphasizing business models centered on making our technology and proprietary materials broadly available to global players in the value chain, we will expand the commercial reach of our technology and accelerate its deployment while maintaining a limited manufacturing footprint.
However, we cannot assure you that these efforts will be successful and, if they are, that they will have the intended effect of increasing profitability.
We may not be able to successfully implement these strategies for a number of reasons, including, but not limited to:
· Unforeseen costs and delays;
· Unexpected legal, regulatory, or administrative hurdles;
· Unfamiliarity with these initiatives;
· Restrictions on our technology; and
· The inability to:
§ Obtain additional capital to pursue such strategies on favorable terms or at all;
§ Protect our intellectual property;
§ Secure viable alternatives to maximize the value of our manufacturing assets and business;
§ Develop products that meet or exceed the qualification standards of OEMs and partners and provide greater value than alternatives;
§ Persuade other catalyst manufacturers to incorporate our technology in their products;
§ Find suitable third parties with whom to enter into licensing or partnering arrangements or invest in our business; and
§ Compete successfully or enter new markets.
In this regard, we have not developed any licensing arrangements or new OEM customers in recent years, and have terminated our joint venture with Pirelli. Moreover, we believe some of these initiatives to be relatively uncommon in our industry, and, as a result, are unfamiliar to us. The success of our business assumes we will be able to execute these strategies and increase our profitability as a result. This assumption is unproven, and, if incorrect, we may be unable to generate sufficient revenues to sustain our business, implement or business strategies, or to obtain profitability.
Furthermore, in attempting to execute these strategies, we may harm our relationships with customers, suppliers, employees or other third parties, any of which could be significant. The process of exploring, financing, and realigning our strategic path may also be disruptive to our business. While we believe the pursuit of these strategies will have a positive effect on our profitability in the long-term, there is no assurance that this will be the case. If we are not successful in our efforts to carry out these strategies , our business, financial condition, and results of operation may be adversely affected.
We may not be able to successfully market new products that are developed or obtain verification or approval of our new products.
Some of our catalyst products and heavy duty diesel systems are still in the development or testing stage with targeted customers. We are developing technologies in these areas that are intended to have a commercial application, however, there is no guarantee that such technologies will actually result in any commercial applications. In addition, we plan to market other emissions reduction devices used in combination with our current products. There are numerous development and verification issues that may preclude the introduction of these products for commercial sale. These proposed operations are subject to all of the risks inherent in a developing business enterprise, including the likelihood of continued operating losses. If we are unable to demonstrate the feasibility of these proposed commercial applications and products or obtain verification or approval for the products from regulatory agencies, we may have to abandon the products or alter our business plan . Such modifications to our business plan will likely delay achievement of revenue milestones and profitability.
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PGMs and rare earth metals price fluctuations could impact financial performance.
Because our catalysts contain platinum, palladium and rhodium, or platinum group metals (PGMs), and rare earth metals, fluctuations in prices could have an adverse impact on our profits as it may not be possible to recover price increases from customers. Additionally, increased prices could result in increased working capital requirements which we may not be able to finance.
We depend on intellectual property and the failure to protect our intellectual property could adversely affect our future growth and success.
We rely on patent, trademark and copyright law, trade secret protection, and confidentiality and other agreements with employees, customers, partners and others to protect our intellectual property. In addition, some of our intellectual property is not protected by any patent or patent application. The lack of patent and trademark protection may be intentional as we may lack sufficient resources to protect our intellectual property in every applicable jurisdiction. As a result, it may be possible for third parties to obtain and use our intellectual property without the need to obtain our authorization.
We do not know whether any patents will be issued from our pending or future patent applications or whether the scope of any issued patents is or will be sufficiently broad to protect our technologies. Moreover, patent applications and issued patents may be challenged or invalidated. We could incur substantial costs in prosecuting or defending patent infringement suits. In addition, the laws of some foreign countries may not protect or enforce intellectual property rights to the same extent as do the laws of the United States.
The patents protecting our proprietary technologies expire after a period of time. Currently, our patents have expiration dates ranging from 2015 through 2032. Although we have attempted to incorporate technology from our core patents into specific patented product applications, product designs and packaging, there can be no assurance that this building block approach will be successful in protecting our proprietary technology and products. If we are not successful in protecting our proprietary technology, it could have a material adverse effect on our business, financial condition and results of operations. Questions have arisen regarding our exclusive ownership and control of certain technologies, including by our principal customer, Honda, and a former employee, who claims ownership in a patent relating to ZPGM . In addition, we have sold technology for exclusive use in Asia to another party. For additional information, refer to Historically, we have been dependent on a few major customers, particularly Honda " above and "We are subject to restrictions and must pay a royalty a royalty on certain sales of our products and technology in specified countries in Asia. below. Past or future weaknesses in control of our intellectual property could render our current strategies unachievable, require that we change our strategies which could prove unsuccessful, result in litigation over ownership issues including the costs thereof and potential adverse findings, require that we pay to license back technology that we developed or co-developed, or otherwise material adversely affect us, our business and our financial performance.
As part of our confidentiality procedures, we generally have entered into nondisclosure agreements with employees, consultants and corporate partners. We also have attempted to control access to and distribution of our technologies, documentation and other proprietary information. We plan to continue these procedures. Despite these procedures, third parties could copy or otherwise obtain and make unauthorized use of our technologies or independently develop similar technologies. The steps that we have taken and that may occur in the future might not prevent misappropriation of our solutions or technologies, particularly in foreign countries where laws or law enforcement practices may not protect the proprietary rights as fully as in the United States.
There can be no assurance that we will be successful in enforcing our proprietary rights. For example, from time to time we have become aware of competing technologies employed by third parties who might be covered by one or more of our patents. In such situations, we may seek to grant licenses to such third parties or seek to stop the infringement, including through the threat of legal action. There is no assurance that we would be successful in negotiating a license agreement on favorable terms, if at all , or able to stop the infringement. Any infringement upon our intellectual property rights could have an adverse effect on our ability to develop and sell commercially competitive systems and components.
If we fail to obtain the right to use the intellectual property rights of others which are necessary to operate our business, our ability to succeed will be adversely affected.
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From time to time, we may choose to or be required to license technology or intellectual property from third parties in connection with the development of our products. We cannot assure you that third-party licenses will be available to us on commercially reasonable terms, if at all. Generally, a license, if granted, would include payments of up-front fees, ongoing royalties or both. These payments or other terms could have an adverse impact on our results of operations. The inability to obtain a necessary third-party license required for our product offerings or to develop new products and product enhancements could require us to substitute technology of lower quality or performance standards, or of greater cost, either of which could adversely affect our business. If we are not able to obtain licenses from third parties, if necessary, then we may also be subject to litigation to defend against infringement claims from these third parties. Our competitors may be able to obtain licenses or cross-license their technology on better terms than we can, which could put us at a competitive disadvantage. If we are unable to obtain or maintain any third-party license required to develop new products and product enhancements, on favorable terms, our results of operations may be harmed.
If third parties claim that our products infringe upon their intellectual property rights, we may be forced to expend significant financial resources and management time litigating such claims and our operating results could suffer.
Third parties may claim that our products and systems infringe upon their patents and other intellectual property rights. Identifying third-party patent rights can be particularly difficult, notably because patent applications are generally not published until up to 18 months after their filing dates. If a competitor were to challenge our patents, or assert that our products or processes infringe their patent or other intellectual property rights, we could incur substantial litigation costs, be forced to make expensive product modifications, pay substantial damages or even be forced to cease some operations. Third-party infringement claims, regardless of their outcome, would not only drain financial resources but also divert the time and effort of management and could result in customers or potential customers limiting or deferring their purchase or use of the affected products or services until resolution of the litigation.
We are subject to restrictions and must pay a royalty on certain sales of our products and technology in specified countries in Asia.
In February 2008, we established a joint venture in Japan called TC Catalyst, Inc., or TCC, with Tanaka Holdings Co., Ltd. (formerly Tanaka Holdings K.K.), a Japanese company, which, together with its subsidiary Tanaka Kikinzoku Kogyo K.K., is referred to herein as TKK. Initially, we and TKK each owned 50% of TCC, but since formation we have sold most of our stake in the venture to TKK and now own 5%. In connection with these transactions, we also sold to TKK certain proprietary technology for sale, licensing or use in various countries in Asia, which we refer to as the Territory. In general, the technology covers our catalyst formulations (including platinum and zero platinum) developed for heavy duty commercial vehicles and other applications through 2013, and for non-commercial light vehicles through 2012. In addition, TKK has a right to cause us to license heavy duty commercial technology to TKK or TCC in exchange for a royalty if TKK or TCC desire to sell related products or services outside the Territory to subsidiaries of OEM customers located within the Territory. We have also agreed not to compete in the Territory with TKK or TCC in connection with heavy duty commercial vehicles and applications and light duty vehicles.
Subsequent to these arrangements, we discovered that an exception allowing us to continue to supply catalysts in Japan to our largest customer, Honda, had been omitted in an amendment to the original transaction documents with TKK. We have shipped approximately $ 5.6 million of catalysts covered by the agreements since such amendment through December 31, 2014. In this regard, we have made a good faith payment of $0.3 million to TKK with respect to such prior shipments.
In addition, on March 13, 2015, we further amended our agreements with TKK and TCC to, among other things, enable us to sell in the Territory (i) coated substrates or certain catalytic materials utilizing the technology we sold to TKK for a 4% royalty to TKK; (ii) coated substrates and certain catalytic materials utilizing solely new technology developed by us after we sold TKK the prior technology, as well as licenses of such technology related to catalysts for heavy-duty commercial vehicles and applications and light duty vehicles, for a 3% royalty to TKK; (iii) products used in vehicles without a royalty, provided that the ultimate user of the vehicle which contains the product purchases the vehicle outside the Territory; (iv) limited quantities of coated substrates or certain catalytic materials sold for the purpose of customer testing, evaluation and approval without a royalty; and (v) limited quantities of coated substrates sold during an extended period of time after mass production ends for a specified vehicle model year program without a royalty.
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Pursuant to the terms of the amendment, once an aggregate amount of approximately $16.6 million in royalties has been paid by us to TKK, we may commercialize any technology without a royalty, including inside the Territory.
Consequently, if we or third parties desire to sell our products or otherwise commercialize certain of our technology in the Territory, we currently would have to pay a royalty to TKK in order to do so, which could adversely affect our ability to expand. In addition, although we believe that the amendment to the parties agreements will generally enable us to pursue our business strategies in the Territory and that, based on discussions with TKK, our non-binding, good faith payment relieves us from further obligations to TKK with respect to past shipments of catalysts covered by the agreements, there can be no assurance that TKK will not assert claims and pursue available remedies, any of which could have an adverse effect on our business.
Failure of one or more key suppliers to timely deliver could prevent, delay or limit us from supplying products. Delays in delivery times for PGM purchases could also result in losses due to fluctuations in prices. Delays in the delivery times and the cost impact of the world-wide shortage of rare earth metals could delay us from supplying products and could result in lower profits.
Due to customer demands and specifications, we are required to source critical materials and components such as ceramic substrates from single suppliers. In 2014, our three largest suppliers accounted for over 50% of our raw material purchases and in 2013, our three largest suppliers accounted for over 40% of our raw material purchases. Failure of one or more of the key suppliers to deliver timely could prevent, delay or limit us from supplying products because we would be required to qualify an alternative supplier. For certain products and customers, we are required to purchase PGM materials. As commodities, PGM materials are subject to daily price fluctuations and significant volatility, based on global market conditions. Historically, the cost of PGMs used in the manufacturing process has been passed through to the customer. This limits the economic risk of changes in market prices to PGM metal usage in excess of nominal amounts allowed by the customer. However, going forward there can be no assurance that we will continue to be successful in passing PGM price risk onto our current and future customers to minimize the risk of financial loss. Additionally, PGM material is accounted for as inventory and therefore subject to lower of cost or market adjustments on a regular basis. A drop in market prices relative to the purchase price of PGMs could result in a write-down of inventory. Due to the high value of PGM materials, special measures have been taken to secure and insure the inventory. There is a risk that these measures may be inadequate and expose us to financial loss. We utilize rare earth metals in the production of some of our catalysts. Due to a reduction in export from China of these materials, there has been a world-wide shortage, leading to a lack of supply and higher prices. We risk delays in shipment due to this constrained supply and potentially lower margins if we are unable to pass the increased costs on to our customers.
Qualified management, marketing, and sales personnel are difficult to locate, hire and train, and if we cannot attract and retain qualified personnel, it will harm the ability of the business to grow.
Our success depends, in part, on our ability to retain current key personnel, attract and retain future key personnel, additional qualified management, marketing, scientific, and engineering personnel, and develop and maintain relationships with research institutions and other outside consultants. Competition for qualified management, technical, sales and marketing employees is intense. In addition, some employees might leave our Company and go to work for competitors. The loss of key personnel or the inability to hire or retain qualified personnel, or the failure to assimilate effectively such personnel could have a material adverse effect on our business, operating results and financial condition.
Any liability for environmental harm or damages resulting from technical faults or failures of our products could be substantial and could adversely affect our business and results of operations.
Customers rely upon our products to meet governmental emissions control standards. Failure of our products to meet such standards could expose us to claims from customers. Our products are also integrated into goods manufactured by our consumers, and therefore, a malfunction or the inadequate design of our products could subject us and our customers to product liability claims. Any liability for environmental harm or damages resulting from technical faults or failures could be substantial and could adversely affect our business and results of operations. In addition, a well-publicized actual or perceived problem could adversely affect the markets perception of our products, which would materially impact our financial condition and operating results.
18
We have entered into contractual agreements in connection with the sale of certain of our assets, which may expose us to liability for claims for indemnification under such agreements.
We have entered into various agreements by which we may be obligated to indemnify the other party with respect to certain matters. Generally, these indemnification provisions provide that we agree to hold the indemnified party harmless against losses arising from a breach of the contract terms. Payments by us under such indemnification clauses are generally conditioned on the other party making a claim. Such claims are generally subject to challenge by us and to dispute resolution procedures specified in the particular contract. Further, our obligations under these arrangements may be limited in terms of time and/or amount and, in some instances, we may have recourse against third parties for certain payments made by us. It is not possible to predict the maximum potential amount of future payments under these indemnification agreements due to the conditional nature of our obligations and the unique facts of each particular agreement.
Risks Related to Our Industry
Future growth of our business depends, in part, on market acceptance of our catalyst products, successful verification of our products and retention of our verifications.
While we believe that there exists a viable market for our developing catalyst products, there can be no assurance that such technology will succeed as an alternative to competitors existing and new products. The development of a market for the products is affected by many factors, some of which are beyond our control. The adoption cycles of our key customers are lengthy and require extensive interaction with the customer to develop an effective and reliable catalyst for a particular application. While we continue to develop and test products with key customers, there can be no guarantee that all such products will be accepted and commercialized. Our relationships with our customers are based on purchase orders rather than long-term formal supply agreements. Generally, once a catalyst has successfully completed the testing and certification stage for a particular application, it is generally the only catalyst used on that application and therefore unlikely that, unless there are any defects, the customer will try to replace that catalyst with a competing product. However, our customers usually have alternate suppliers for their products and there is no assurance that we will continue to win the business. Also, although we work with our customers to obtain product verifications in accordance with their projected production requirements, there is no guarantee that we will be able to receive all necessary approvals for our catalysts by the time a customer needs such products, or that a customer will not accelerate its requirements. If we are not successful in having verified catalyst products to meet customer requirements, it will have a negative effect on our revenues, which could have a material adverse effect on our results of operations.
If a market fails to develop or develops more slowly than anticipated, we may be unable to recover the costs we will have incurred in the development of our products and may never achieve profitability. In addition, we cannot guarantee that we will continue to develop, manufacture or market our products or components if market conditions do not support the continuation of the product or component.
We believe that it is an essential requirement of the U.S. retrofit market that emissions control products and systems are verified under the EPA and/or CARB protocols to qualify for funding from the EPA and/or CARB programs. Funding for these emissions control products and systems is generally limited to those products and technologies that have already been verified. Verification is also useful for commercial acceptability. Notably, EPA verifications were withdrawn on two of our products in January 2009 because available test results were not accepted by the EPA as meeting new emissions testing requirements for nitrogen dioxide (NO2) measurement. As a general matter, we have no assurance that our products will be verified by the CARB or that such a verification will be acceptable to the EPA. If we are not able to obtain or maintain necessary product verifications, it will limit our ability to commercialize such products, which could have a negative effect on our revenues and on our results of operations.
Our results may fluctuate due to certain regulatory, marketing and competitive factors over which we have little or no control.
The factors listed below, some of which we cannot control, may cause our revenue and results of operations to fluctuate significantly:
· Actions taken by regulatory bodies relating to the verification, registration or health effects of our products;
· The extent to which our products obtain market acceptance;
· The timing and size of customer purchases;
· Customer concerns about the stability of our business, which could cause them to seek alternatives to our solutions and products; and
· Increases in raw material costs, particularly platinum group metals and rare earth metals.
19
We face constant changes in governmental standards by which our products are evaluated.
We believe that, due to the constant focus on the environment and clean air standards throughout the world, requirements in the future to adhere to new and more stringent regulations are possible as governmental agencies seek to improve standards required for certification of products intended to promote clean air. In the event our products fail to meet these ever-changing standards, some or all of our products may become obsolete.
We face competition and technological advances by competitors.
There is significant competition among companies that provide solutions for pollutant emissions from internal combustion engines. Several companies market products that compete directly with our products. Other companies offer products that potential customers may consider to be acceptable alternatives to our products and services, including products that are verified by the EPA, the CARB or other environmental authorities. We face direct competition from companies with greater financial, technological, manufacturing and personnel resources. Newly developed products could be more effective and cost-efficient than our current or future products. We also face indirect competition from vehicles using alternative fuels, such as methanol, hydrogen, ethanol and electricity.
New standards, lower environmental limits or stricter regulation for health reasons of platinum or cerium metals could be adopted and affect use of our products.
New standards or environmental limits on the use of platinum or cerium metals by a governmental agency could adversely affect our ability to use our Platinum Plus ® fuel-borne catalyst in some applications. Government or regulatory bodies in countries where we sell our Platinum Plus ® fuel-borne catalyst could adopt limits or regulations with regards to platinum and cerium metals that could impact our ability to sell Platinum Plus ® and related fuel borne catalysts.
Risks Related to Our Common Stock
The price of our common stock may be adversely affected by the sale by us or our shareholders of a significant number of new common shares.
The sale, or availability for sale, of substantial amounts of our common stock could adversely affect the market price of our common stock and could impair our ability to raise additional working capital through the sale of equity securities. For example, on April 4, 2014, we issued 2,030,000 shares of our common stock and warrants to purchase 812,000 shares of our common stock in a registered direct offering under our shelf registration statement. Also, on November 4, 2014, we entered into subscription agreements to issue 1,385,000 shares of our common stock, series A warrants to purchase up to 388,393 shares of common stock and series B warrants to purchase up to 168,571 shares of common stock under our shelf registration statement. Resale of shares, including shares received upon exercise of warrants, that we may issue from time to time by the holders thereof could contribute to downward pressure on the trading price of our stock.
To provide us with additional flexibility to access capital markets for general corporate purposes, we filed a shelf registration statement which was declared effective by the SEC on May 21, 2012. The shelf registration statement permits us to sell, from time to time, up to an aggregate $50.0 million of various securities, including common stock, preferred stock, warrants to purchase common stock or preferred stock and units consisting of one or more of the foregoing or any combination of such securities. To the extent that we raise additional capital by issuing equity securities under our shelf registration statement, our stockholders may experience dilution. Any dilution or potential dilution may cause our stockholders to sell their shares, which could contribute to a downward movement in the trading price of our stock.
The risk of dilution, perceived or actual, may contribute to downward pressure on the trading price of our stock.
We have outstanding warrants and stock options to purchase shares of our common stock, and additional shares or warrants or options to acquire shares of our common stock may be issued in the future. The exercise of these securities will result in the issuance of additional shares of our common stock. We may also issue additional shares of our common stock or securities exercisable for or convertible into shares of our common stock, whether in the public market or in a private placement to fund our operations, or as compensation. These issuances, particularly where the exercise price or purchase price is less than the current trading price for our common stock, could be viewed as dilutive to the holders of our common stock. The risk of dilution, perceived or actual, may cause existing stockholders to sell their shares of stock, which could contribute to a decrease in the price of shares of our common stock. In that regard, downward pressure on the trading price of our common stock may also cause investors to engage in short sales, which could further contribute to downward pressure on the trading price of our stock.
There has been and may continue to be significant volatility in the volume and price of our common stock on the NASDAQ Capital Market and an investment in our stock could suffer a decline in value.
CDTIs common stock began trading on the NASDAQ Capital Market effective October 3, 2007. In the period immediately following the Merger and the reverse stock split, we experienced significantly higher trading volume than typical for our Company. Unusual trading volume in our shares has continued to occur from time to time. For example, the trading volume in our common stock exceeded thirty-five million shares on October 30, 2014, whereas the average trading volume for the three weeks prior to that date was 86,200 shares per day. The market price of our common stock also has been and may continue to be highly volatile. During the last two weeks of October 2010 following the Merger and the reverse stock split, the price for a share of our common stock ranged from as low as $1.50 per share to as high as $44.38 per share. On March 2, 2015, the closing price for a share of our common stock was $2.01 per share. Factors, including announcements of technological innovations by us or other companies, regulatory matters, new or existing products or procedures, concerns about our financial position, operations results, litigation, government regulation, developments or disputes relating to agreements, patents or proprietary rights, may have a significant impact on the market volume and price of our stock.
As a publicly traded company, CDTi is assessed periodically by securities analysts. Changes in assessments by such analysts may increase the volatility or our stock price and may result in a decline in value if the assessments are negative.
We have not paid and do not intend to pay dividends on shares of our common stock.
We have not paid dividends on our common stock since inception, and do not intend to pay any dividends to our stockholders in the foreseeable future. We intend to reinvest earnings, if any, in the development and expansion of our business.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
Our Catalyst division uses approximately 52,000 square feet of space in Oxnard, California under three separate lease agreements, one that is month-to-month, one that expires on December 31, 2016 and one that expires on April 30, 2018. Our Oxnard facilities include our corporate headquarters, contain a warehouse that is used for shipping and receiving, and are also used for manufacturing and research and development. Our Catalyst division also leases approximately 800 square feet of space in Tokyo, Japan under a lease agreement that expires on June 14, 2016, which is used for sales and marketing purposes.
Our Heavy Duty Diesel Systems division uses approximately 51,000 square feet of space in Ontario, Canada under a lease agreement that expires on December 31, 2018 for administrative, research and development, manufacturing, sales and marketing functions; approximately 4,300 square feet of space in Malmö, Sweden for administrative, research and development and European sales and marketing; and an office in a shared office suite complex in Whyteleafe, Surrey, United Kingdom (outside London) for administrative and sales and marketing which we lease on a month-to-month basis.
We do not anticipate the need to acquire additional space in the near future and consider our current capacity to be sufficient for current operations and projected growth. As such, we do not expect that our rental costs will increase substantially from the amounts historically paid in 2014.
Refer to Note 16, Commitments and Contingencies.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
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Market Information
Our common stock is traded on The NASDAQ Capital Market under the symbol CDTI. For a 20-trading day period immediately following the Merger and the one-for-six reverse stock split, both of which took effect October 15, 2010, it temporarily traded under the symbol CDTID in accordance with NASDAQs rules.
The following table sets forth the high and low prices of our common stock on The NASDAQ Capital Market for each of the periods listed. Prices indicated below with respect to our share price include inter-dealer prices, without retail mark up, mark down or commission and may not necessarily represent actual transactions.
|
NASDAQ Capital Market |
||||
|
High |
|
Low |
||
2013 |
|
|
|
|
|
1 st Quarter |
$ |
3.05 |
|
$ |
2.10 |
2 nd Quarter |
$ |
2.27 |
|
$ |
1.15 |
3 rd Quarter |
$ |
2.08 |
|
$ |
1.10 |
4 th Quarter |
$ |
1.86 |
|
$ |
1.31 |
2014 |
|
|
|
|
|
1 st Quarter |
$ |
7.39 |
|
$ |
1.51 |
2 nd Quarter |
$ |
3.48 |
|
$ |
2.25 |
3 rd Quarter |
$ |
2.81 |
|
$ |
1.65 |
4 th Quarter |
$ |
3.97 |
|
$ |
1.41 |
Holders
At March 5, 2015, there were 202 holders of record of our common stock, which excludes stockholders whose shares were held by brokerage firms, depositories and other institutional firms in street name for their customers.
Dividends
No dividends have been paid on our common stock and we do not anticipate paying dividends in the foreseeable future.
Issuances of Unregistered Securities
On November 11, 2014, we issued warrants to purchase up to 80,000 shares of our common stock to Kanis S.A., one of our principal lenders and shareholders, at an exercise price per share of $1.75 for a five year period. The warrants were issued in connection with a letter agreement we entered into with Kanis S.A. as consideration for Kanis S.A. agreeing to amend the terms of outstanding loans made to us. The warrants issued to Kanis S.A. were issued to a non-U.S. person (as defined in Regulation S of the Securities Act of 1933, as amended) in an offshore transaction in which the Company relied on the exemptions from the registration requirements provided for in Regulation S of the Securities Act of 1933, as amended. The issuance of the warrants to Kanis S.A was made without any underwriting discounts or commissions.
Securities Authorized for Issuance Under Equity Compensation Plans
Refer to Part III Item 12Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
ITEM 6. SELECTED FINANCIAL DATA
Not applicable.
22
ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K. This discussion contains forward-looking statements, the accuracy of which involves risks and uncertainties, see Cautionary Statement Concerning Forward-Looking Statements. Our actual results could differ materially from those anticipated in these forward-looking statements for many reasons, as a result of many important factors, including those set forth in Part I Item 1A Risk Factors .
References to Notes are notes included in the consolidated financial statements included in this Annual Report on Form 10-K.
Our business is evolving from being a niche manufacturer of emissions control solutions for the automotive original equipment manufacturer (OEM), and aftermarket markets to becoming an advanced materials technology provider for these markets. Recently, we announced that testing was underway for our new Spinel technology, which is a family of proprietary materials incorporating various base metals that replace costly platinum group metals, or PGMs, and rare earth metals in coatings on vehicle catalytic converters. Once verified, we intend to commercialize our Spinel technology by supplying proprietary powders and/or licenses to other vehicle catalyst manufacturers as well as manufacturing catalysts for select customers in our existing facilities. We believe that this business model will allow us to achieve greater scale and higher return on our technology investment than in the past.
We currently commercialize our materials technology by manufacturing and distributing light duty vehicle catalysts and heavy duty diesel emissions control systems and products to major automakers, distributors, integrators and retrofitters. We have more than 14 years history of supplying catalysts to light duty vehicle OEMs and 35 years of experience in the heavy duty diesel systems market. We have a proven technical and manufacturing competence in the light duty vehicle catalyst market meeting auto makers stringent requirements for performance, quality and delivery. Our business is driven by increasingly stringent global emission standards for internal combustion engines, which are major sources of a variety of harmful pollutants. Since inception, we have developed a substantial portfolio of patents and related proprietary rights and extensive technological know-how.
We organize our operations in two business divisions: Catalyst and Heavy Duty Diesel Systems.
Catalyst: Utilizing our advanced materials technology platform, we develop and produce catalysts to reduce emissions from gasoline, diesel and natural gas combustion engines. Most catalytic systems require significant amounts of costly PGMs to operate efficiently. Using our proprietary mixed-phase catalyst, or MPC ® , technology, we have developed a family of unique high-performance catalysts, featuring inexpensive base-metals with low or even no PGM content. We expect that our new Spinel technology will enable further advances in catalyst performance and further reductions in PGM usage. Our technical and manufacturing capabilities have been established to meet automakers most stringent requirements. Since 2001, we have supplied over eleven million parts to light duty vehicle OEM customers. Our Catalyst division is also a supplier of products for our Heavy Duty Diesel Systems division. Revenues from our Catalyst division accounted for approximately 53% and 44% of the total consolidated revenues for the years ended December 31, 2014 and 2013, respectively.
Heavy Duty Diesel Systems: We specialize in the design and manufacture of verified exhaust emissions control solutions, and we offer a full range of products for the verified retrofit and non-retrofit OEM and aftermarket markets through our distribution/dealer network and direct sales. We believe we offer one of the industrys most comprehensive portfolios of emissions control systems for use in engine retrofit programs that have been evaluated and verified as compliant with applicable regulations by the United States, or U.S., Environmental Protection Agency, or EPA, and the California Air Resources Board, or CARB, as well as by regulators in several European countries. Recently, we launched our DuraFit OEM replacement diesel particulate filters, which leverage our proprietary catalyst technology within the medium and heavy duty vehicle parts replacement market, a new market segment for us. Sales of emissions control systems by our Heavy Duty Diesel Systems division are driven by the regulation of diesel emissions, particularly in the State of California. Revenues from our Heavy Duty Diesel Systems division accounted for approximately 47% and 56% of the total consolidated revenues for the years ended December 31, 2014 and 2013, respectively.
Strategy
Our strategy is to transition from being a niche manufacturer of emissions control solutions for the automotive OEM, retrofit and aftermarket markets to becoming an advanced materials technology provider for these markets. In support of this strategy, we have filed a significant number of patents that underpin next-generation technology for our advanced low-PGM catalysts including synergized-PGM, or SPGM , as well as zero-PGM, or ZPGM , catalysts. We were recently awarded two significant patents for our new Spinel technology, a proprietary clean emissions exhaust platform aimed at improved catalytic performance, which we believe will dramatically reduce the cost of compliance with more stringent clean-air requirements. This is becoming increasingly relevant as new standards, such as the EPAs Tier 3, become effective and drive expected increases in the compliance costs of using PGMs with conventional formulation technology.
We are currently conducting vehicle testing to validate our Spinel technology for specific introductory products for global OEMs, with a goal of accelerating broad commercialization of this technology. Once validated, we intend to make it available to OEMs and other catalytic coaters for potential use in proprietary powder form and/or through licensing. We foresee multiple paths to market this technology to complement our existing business model.
We plan to continue to maintain our current world-class manufacturing capability, and deploy it selectively where it adds value for our customers; to explore new joint ventures and partnerships; and to pursue new verticals. We intend to continue to evaluate and refine our strategic plan in order to seize opportunities as they arise.
Since 2013, we have filed nearly 100 patents pertaining to our advanced low-PGM and ZPGM catalysts. The development of our advanced low-PGM and ZPGM catalysts utilizing our Spinel technology and their commercialization is a strategic priority and will require investment in research, development, marketing and sales.
Recent Developments
2014 Equity Offerings
On April 4, 2014, we closed a registered direct offering in which we sold 2,030,000 shares of common stock and warrants to purchase 812,000 shares of common stock. The securities were sold in units at $3.40 per unit, with each unit consisting of one share of common stock and 0.4 of a warrant to purchase one share of common stock. The warrants have an exercise price of $4.20 per share and can be exercised during the period commencing after six months and ending five and a half years from the date of issuance. We received net proceeds of $6.1 million after deducting placement agent fees and other offering expenses.
On November 4, 2014, we completed a registered direct offering in which we sold 1,385,000 shares of common stock, warrants to purchase up to an aggregate of 388,393 shares of common stock with an exercise price of $3.25 per share (the Series A Warrants), for a combined purchase price of $2.80 per share and 0.28 of one Series A Warrant, and other warrants to purchase up to an aggregate of 168,571 shares of common stock with an exercise price of $0.01 per share (the Series B Warrants) for a purchase price of $2.79 per Series B Warrant. We received net proceeds of $3.8 million after deducting placement agent fees and other offering expenses.
We plan to use the net proceeds from our recent offerings for general corporate purposes, including working capital, general and administrative expenses, capital expenditures and implementation of our strategic priorities. We may also use a portion of the net proceeds to acquire or invest in businesses, products and technologies that are complementary to our current business, although we have no present commitments or agreements for any such transactions.
Sale of Standard Exhaust and Specialty Parts Business
On October 20, 2014, we completed the sale of our Reno, Nevada-based custom fabricated exhaust parts and accessories business, or the Reno Business, for $1.3 million in cash. Historically, the Reno Business was included in our Heavy Duty Diesel Systems division, and we have now classified it as held for sale and the operations have been reported as discontinued operations. The sale of this non-core business increases our ability to fund key investments to broaden our growing intellectual property portfolio and to bring to market new products. The net assets held for sale of the Reno Business were eliminated from our balance sheet as of the sale date, and we recognized a gain of $0.2 million.
All discussions and amounts in Management's Discussion and Analysis for all periods presented relate to continuing operations only, unless otherwise noted.
Letter Agreement to Amend Shareholder Notes Payable
On November 11, 2014, we and Kanis S.A. entered into a letter agreement whereby Kanis S.A. agreed to amend the terms of the outstanding loans made to us, such that (i) the maturity dates of all outstanding loans were extended to October 1, 2016; and (ii) the early redemption feature applicable to one of the outstanding loans was removed. For additional information, refer to Note 9, Debt.
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Expanding Commercialization Opportunities in the Asia Territory (the Territory)
On March 13, 2015, we amended our existing agreements with Tanaka Holdings Kabushiki Kaisha, a Japanese company, which together with its subsidiary Tanaka Kikinzoku Kogyo Kabushiki Kaisha is referred to herein as TKK, and TC Catalyst, Inc., or TCC, a joint venture formed by us and TKK, to, among other things, enable us to sell in the Territory (i) coated substrates or certain catalytic materials utilizing the technology we sold to TKK for a 4% royalty to TKK; (ii) coated substrates and certain catalytic materials utilizing solely new technology developed by us after we sold TKK the prior technology, as well as licenses of such technology related to catalysts for heavy-duty commercial vehicles and applications and light duty vehicles, for a 3% royalty to TKK; (iii) products used in vehicles without a royalty, provided that the ultimate user of the vehicle which contains the product purchases the vehicle outside the Territory; (iv) limited quantities of coated substrates or certain catalytic materials sold for the purpose of customer testing, evaluation and approval without a royalty; (v) limited quantities of coated substrates sold during an extended period of time after mass production ends for a specified vehicle model year program without a royalty; and (vi) once an aggregate amount of approximately $16.6 million in royalties has been paid by us to TKK, any technology (or otherwise commercialize such technology) without a royalty. For additional information, refer to Note 15, Equity Investments and Item 1.A. Risk Factors We are subject to restrictions and must pay a royalty on certain sales of our products and technology in specified countries in Asia .
Sources of Revenues and Expenses
We generate revenues primarily from the sale of our emission control systems and products. We generally recognize revenues from the sale of our emission control systems and products upon shipment of these products to our customers. However, for certain customers, where risk of loss transfers at the destination (typically the customers warehouse), revenue is recognized when the products are delivered to the destination.
Our cost of revenues consists primarily of direct costs for the manufacture of emission control systems and products, including cost of raw materials, costs of leasing and operating manufacturing facilities and wages and benefits paid to personnel involved in production, manufacturing, quality control, testing and supply chain management. In addition, cost of revenues include normal scrap and shrinkage associated with the manufacturing process and expenses from write-downs of obsolete and slow moving inventory. We include the direct material costs and factory labor as well as factory overhead expense in cost of revenues. Indirect factory expense includes the costs of freight (inbound and outbound for direct material and finished goods), purchasing and receiving, inspection, testing, warehousing, utilities and deprecation of facilities and equipment utilized in the production and distribution of products.
Our selling, general and administrative expenses, or SG&A, includes the salary and benefits for sales, marketing and administrative staff as well as samples provided at no-cost to customers, marketing materials, travel, legal, accounting and other professional fees, corporate expenses, regulatory fees and bad debt. Also included is any depreciation related to assets utilized in the SG&A functions, as well as amortization of acquired intangible assets.
Our research and development expenses, or R&D, consists of costs associated with research related to new product development and product enhancement expenditures. R&D also includes costs associated with vehicle testing of our catalysts on engines and vehicles in independent testing facilities, getting our heavy duty diesel systems verified and approved for sale by the EPA , the CARB and other regulatory authorities. R&D includes the salary and benefits for the research and development staff as well as travel, research materials, testing and legal expense related to patenting intellectual property. Also included is any depreciation related to assets utilized in the development of new products.
Other income (expense) primarily reflects interest expense, including amortization of debt discounts and premiums and amortization of debt issuance costs, our portion of loss or income from unconsolidated affiliates and changes in the fair value of our liability-classified warrants. It also includes loss on foreign exchange and interest income.
Critical Accounting Policies and Estimates
The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires the use of estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosures in the financial statements. Critical accounting policies are those accounting policies that may be material due to the levels of subjectivity and judgment necessary to account for highly uncertain matters or the susceptibility of such matters to change, and that have a material impact on financial condition or operating performance. While we base our estimates and judgments on our experience and on various other factors that we believe to be reasonable under the circumstances, actual results may differ materially. For additional information relating to these and other accounting policies, refer to Note 2, Significant Accounting Policies.
Goodwill. We test goodwill for impairment at the reporting unit level at least annually, as of October 31, using a two-step process, and more frequently upon the occurrence of certain triggering events. Our Engine Control Systems reporting unit, which is within our Heavy Duty Diesel Systems reporting segment, has goodwill subject to impairment testing, which totalled $5.2 million and $5.6 million at December 31, 2014 and 2013, respectively. Goodwill impairment testing requires us to estimate the fair value of the reporting unit. The estimate of fair value is based on internally developed assumptions approximating those that a market participant would use in valuing the reporting unit. We derived the estimated fair value of the Engine Control Systems reporting unit at October 31, 2014 from a blending of market and income approach models. We utilized a weighting of 25% and 75% between the market and income approaches, respectively. Significant assumptions used in deriving the fair value of the reporting unit under the income approach included: annual revenue growth over the next five years ranging from 8% to 43%, long-term revenue growth of 3% and a discount rate of 25%. Significant assumptions used in deriving the fair value of the reporting unit under the market approach included: average multiples of 0.9 times on revenue and 5.7 times on EBITDA. The discount rate of 25.0% was developed based on a weighted cost of capital (WACC) analysis. Within the WACC analysis, the cost of equity assumption was developed using the Capital Asset Pricing Model (CAPM). The inputs in both the CAPM and the cost of debt assumption utilized in the WACC were developed for our Engine Control Systems business reporting unit using data from comparable companies. The revenue growth rates used are higher than our historical growth patterns and consider future growth potential identified by management, however, there is no assurance such growth will be achieved. In addition, we considered the overall fair value of our reporting units as compared to our market capitalization. Because the estimated fair value of the reporting unit substantially exceeded its carrying value, we determined that no goodwill impairment existed as of October 31, 2014. However, it is reasonably possible that future results may differ from the estimates made during 2014 and future impairment tests may result in a different conclusion for the goodwill of our Engine Controls Systems reporting unit. In addition, the use of different estimates or assumptions by management could lead to different results. Our estimate of fair value of the reporting unit is sensitive to certain factors, including but not limited to the following: movements in our share price, changes in discount rates and our cost of capital, growth of the reporting units revenue, cost structure of the reporting unit, successful completion of research and development, capital expenditures, customer acceptance of new products, competition, general economic conditions and approval of the reporting units product by regulatory agencies.
Impairment of Long-Lived Assets Other Than Goodwill. We evaluate long-lived assets, including intangible assets other than goodwill, for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. An impairment is considered to exist if the total estimated future cash flows on an undiscounted basis are less than the carrying amount of the assets. If an impairment does exist, we measure the impairment loss and record it based on discounted estimated future cash flows. In estimating future cash flows, we group assets at the lowest level for which there are identifiable cash flows that are largely independent of cash flows from other asset groups. Considerable judgment is necessary to estimate the fair value of the assets and, accordingly, actual results could vary significantly from such estimates. Our most significant estimates and judgments relating to the long-lived asset impairments include the timing and amount of projected future cash flows. These estimates and judgments are based upon, among other things, certain assumptions about expected future operating performance and growth rates and other factors, actual results of which may vary significantly.
In 2014, we considered whether any events or changes in circumstance indicated that the carrying amount of our long-lived assets may not be recoverable and concluded that no such triggering event had occurred during 2014 that would lead us to believe that the assets were impaired. Therefore, no further testing was performed. To the extent additional events or changes in circumstances occur, we may conclude that a non-cash impairment charge is required, which would have an adverse effect on our financial condition and results of operations.
Warrant Derivative Liability. In light of the terms of certain of our outstanding warrants, we have determined that we are required to carry them at fair value until exercised or expired, and record changes in their fair value in our results of operations in each reporting period. At December 31, 2014, we had a liability of $1.5 million related to liability-classified warrants. For the year ended December 31, 2014, we recorded a non-cash loss of $0.5 million to other income (expense), net in our consolidated statement of comprehensive loss to reflect the change in fair value of these liability-classified warrants. The determination of fair value requires us to use of judgment. For common stock warrants with market conditions, we use the Monte Carlo pricing model to determine fair value. For other common stock warrants, we use the Black-Scholes option-valuation model, which requires that we make certain assumptions regarding: (i) the expected volatility in the market price of our common stock; (ii) dividend yield; (iii) risk-free interest rates; and (iv) the contractual terms of the warrants. These variables are projected based on our historical data, experience, and other factors. Changes in any of these variables could result in material adjustments to the non-cash gain or loss recognized for changes in the valuation of the warrant derivative liability.
Our business with Honda has grown steadily in the last few years as we have expanded the sale of our catalyst solutions from four passenger vehicle models in 2012 to eight models in 2014. In conjunction with our longstanding relationship with Honda, we entered into a joint research agreement with the motorcycle division of Honda regarding the development of ZPGM catalysts for motorcycles. The agreement was signed in 2010, extended in 2012 and expired in March 2014, although confidentiality provisions continue to survive. The agreement provides that technology within the scope of the agreement developed solely by one party is owned by that party, and that technology within the scope of the agreement that is jointly developed by both parties is jointly owned. The parties are in the process of assessing what technology, if any, developed during the term of the agreement is jointly owned. While we believe that core technology within the scope of the agreement was developed solely by us, there can be no assurance that our belief will not be challenged or invalidated. To the extent that Honda is a joint owner of critical technology developed under the agreement, Honda (including its automotive division) might not be required to pay us a license or royalty fee for use of the jointly owned technology; Honda may be able to manufacture its own catalysts based on the jointly owned technology; and Honda may be able to license the jointly owned technology to others without our consent. In addition, under the terms of the agreement, we may not be able to license jointly owned technology to others without Hondas consent. Our inability to license jointly owned technology to others could adversely affect our technology licensing strategy. Further, as noted above, we do not have long-term supply agreements with Honda, and accordingly, Honda could terminate its relationship with us at any time for any reason.
Government Funding and Standards
The nature of our business is heavily influenced by government funding of emissions control projects and increased emission control regulations and mandates. Compliance with these regulatory initiatives drives demand for our products and the timing of the implementation of emission reduction projects. We believe that, due to the constant focus on the environment and clean air standards throughout the world, it can be expected that new and more stringent regulations, both domestically and abroad, will continually be adopted, requiring the ongoing development of new products that meet these standards. However, emission reduction programs are often one-off, or have staggered compliance dates, which mean they do not generally result in a regular source of recurring revenues for our company.
Macroeconomic Factors Impacting the Automotive Industry
Since the customers of our Catalyst division are primarily OEM auto makers, this division is generally affected by macroeconomic factors impacting the automotive industry. Demand for our products is tied directly to the demand for vehicles. Accordingly, factors that affect the truck and automobile markets have a direct effect on our business, including factors outside of our control, such as vehicle sales slowdowns due to economic concerns, or as a result of natural disasters, including earthquakes and/or tsunamis.
In addition, our business, operations, results of operation and financial condition may be affected by other factors, including those discussed in Part I, Item 1A Risk Factors of this Annual Report on Form 10-K, and our other filings with the SEC.
Results of Operations
The tables in the discussion that follow are based upon the way we analyze our business. For additional information regarding our reportable segments, refer to Note 17, Segment Reporting.
Revenues
|
Year Ended December 31, |
|||||||||||||
|
|
|
|
% of Total Revenues |
|
|
|
|
% of Total Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change |
|||||
|
2014 |
|
|
2013 |
|
|
$ |
|
% |
|||||
|
($ in thousands) |
|||||||||||||
Heavy Duty Diesel Systems |
$ |
19,577 |
|
47% |
|
$ |
29,131 |
|
56% |
|
$ |
(9,554) |
|
(33)% |
Catalyst |
|
23,772 |
|
58% |
|
|
25,823 |
|
50% |
|
|
(2,051) |
|
(8)% |
Intercompany revenues (1) |
|
(2,118) |
|
(5)% |
|
|
(3,153) |
|
(6)% |
|
|
1,035 |
|
33% |
Total revenues |
$ |
41,231 |
|
100% |
|
$ |
51,801 |
|
100% |
|
$ |
(10,570) |
|
(20)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) We eliminate intercompany sales by the Catalyst division to our Heavy Duty Diesel Systems division in consolidation. |
29
Excluding intercompany revenue, the $1.0 million decrease in revenues for our Catalyst division was primarily due to a decrease in sales of service parts.
Gross Profit
|
Year Ended December 31, |
||||||||||
|
|
|
|
% of Revenues (1) |
|
|
|
|
% of Revenues (1) |
|
|
|
|
|
|
|
|
|
|
|
Percentage point change in gross profit margin |
||
|
2014 |
|
|
2013 |
|
|
|||||
|
($ in thousands) |
||||||||||
Heavy Duty Diesel Systems |
$ |
6,713 |
|
34% |
|
$ |
9,382 |
|
32% |
|
2% |
Catalyst |
|
5,879 |
|
25% |
|
|
5,411 |
|
21% |
|
4% |
Intercompany eliminations (1) |
|
(139) |
|
- |
|
|
168 |
|
- |
|
- |
Total gross profit |
$ |
12,453 |
|
30% |
|
$ |
14,961 |
|
29% |
|
1% |
|
|
|
|
|
|
|
|
|
|
|
|
(1) Division calculation based on division revenues. Total based on total revenues.
|
The increase in gross margin for our Heavy Duty Diesel Systems division was a result of improved manufacturing efficiency, lower substrate costs due to introduction of a second source supplier and favorable product mix.
The increase in gross margin for our Catalyst division was due to a favorable product mix resulting from an expansion of models sold to our Japanese OEM, lower costs of certain chemicals, lower diesel substrate costs as well as a change from purchased to consigned for certain substrates used in product sold to our Heavy Duty Diesel Systems division.
Operating Expenses
|
Year Ended December 31, |
|||||||||||||
|
|
|
|
% of
Revenue |
|
|
|
|
% of Total Revenue |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change |
|||||
|
2014 |
|
|
2013 |
|
|
$ |
|
% |
|||||
|
($ in thousands) |
|||||||||||||
SG & A |
$ |
12,374 |
|
30% |
|
$ |
13,339 |
|
26% |
|
$ |
(965) |
|
(7)% |
R & D |
|
6,538 |
|
16% |
|
|
4,726 |
|
9% |
|
|
1,812 |
|
38% |
Severance and other charges |
|
1,166 |
|
3% |
|
|
1,239 |
|
2% |
|
|
(73) |
|
(6)% |
Total operating expenses |
$ |
20,078 |
|
49% |
|
$ |
19,304 |
|
37% |
|
$ |
774 |
|
4% |
SG&A
The decrease in selling, general and administrative expenses was primarily due to $1.0 million of savings due to employee related costs and a $0.3 million gain on the sale of a building at one of our foreign locations, partially offset by a $0.3 million payment to a joint venture partner related to discussions concerning conducting business in the Asia territory and increased professional fees. For additional information regarding SG&A cost savings, refer to the Severance and Other Charges discussion below. For additional information regarding the payment to a joint venture partner, refer to Note 15, Equity Investments.
R&D
The increase in research and development was primarily due to development work and outside testing related to new products, employee related costs, patent filings and consultant costs to support our technology initiatives.
Severance and Other Charges
During the year ended December 31, 2013, we incurred severance costs related to our North American, European and Asian locations, including severance benefits covering a one year period for our former chief executive officer, pursuant to a separation and release agreement. We also incurred lease termination costs related to the exit of a lease in North America and asset impairment expense related to the exit of this facility as well as to the exit of a leased facility in the U.K. Also included in severance and other charges was $0.6 million related to a legal settlement, dated March 13, 2014, with a former chief financial officer and legal expenses incurred related to the matter. This settlement included a lump sum amount of $0.4 million and 75,000 shares of our common stock.
During the year ended December 31, 2014, we incurred severance costs related to our North American and U.K. locations, including severance benefits covering a one year period for our former chief financial officer, pursuant to a separation and release agreement. The Company incurred additional lease exit costs related to the exit of leases in North America. Also included in severance and other charges was an additional $0.1 million related to the increase in fair value of our common stock associated with the aforementioned legal settlement, dated March 13, 2014, and $0.1 million related to the settlement of a customer dispute.
30
Other Expense, Net
|
Year Ended December 31, |
|||||||||
|
2014 |
|
2013 |
|
Change |
|||||
|
|
|
$ |
|
% |
|||||
|
($ in thousands) |
|||||||||
Interest expense |
$ |
(1,176) |
|
$ |
(1,404) |
|
$ |
(228) |
|
(16)% |
Other expense, net |
|
(174) |
|
|
(756) |
|
|
(582) |
|
(77)% |
Total other expense |
$ |
(1,350) |
|
$ |
(2,160) |
|
$ |
(810) |
|
(38)% |
The decrease in interest expense was due to lower average balances outstanding under the Faunus Group International, Inc. (FGI) facility. For additional information regarding the FGI facility, refer to the Description of Indebtedness discussion below.
The decrease in other expense, net was primarily attributable to completing the dissolution of a joint venture with Pirelli during 2014 and favorable exchange gains primarily due to changes in the value of the Canadian dollar in relation to the U.S. dollar. Partially offsetting these decreases were additional losses from the change in fair value of our liability-classified warrants and additional offering costs attributable to the fair value of warrants issued.
Income taxes
We incurred income tax expense of $0.1 million and $0.3 million during the years ended December 31, 2014 and 2013, respectively. Our effective income tax rate was (2)% for the year ended December 31, 2014, compared to (5)% for the year ended December 31, 2013. The differences between our effective tax rate and the U.S. statutory tax rate was primarily related to the valuation allowance offsetting the deferred tax assets in both the U.S. and U.K. jurisdictions, as well as Swedish and Canadian foreign tax rate differentials.
Liquidity and Capital Resources
Historically, the revenue that we have generated has not been sufficient to fund our operating requirements and debt servicing needs. Notably, we have suffered recurring losses since inception. A s of December 31, 2014, we had an accumulated deficit of approximately $191.1 million compared to $181.7 million at December 31, 2013. We have also had negative cash flows from operations from inception through the year ended December 31, 2014. Our primary sources of liquidity in recent years have been asset sales, credit facilities and other borrowings and equity sales.
At December 31, 2014 and 2013, $1.4 million and $1.6 million, respectively, of our cash was held by foreign subsidiaries in Canada, Sweden and the U.K. We do not intend to repatriate any amount of this cash to the United States as it will be used to fund our subsidiaries continued operations. If we decide to repatriate unremitted foreign earnings in the future, it could have negative tax implications.
We have a $7.5 million secured demand financing facility with FGI backed by our receivables and inventory that terminates on August 15, 2015 and may be extended at our option for additional one-year terms. However, FGI can cancel the facility at any time. For additional information regarding the FGI facility, refer to the Description of Indebtedness discussion below. At December 31, 2014, we had $2.8 million in borrowings outstanding with $4.7 million available under our FGI credit facility, subject to the availability of eligible accounts receivable and inventory balances for collateral. However, there is no guarantee that we will be able to borrow to the full limit of $7.5 million if FGI chooses not to finance a portion of our receivables or inventory.
On May 15, 2012, we filed a shelf registration statement on Form S-3 with the SEC (the "Shelf Registration"), which permits us to sell, from time to time, up to an aggregate of $50.0 million of various securities. However, we may not sell our securities in a primary offering pursuant the Shelf Registration or any other registration statement on Form S-3 with a value exceeding one-third of our public float in any 12-month period, unless our public float rises to $75.0 million or more. The Shelf Registration is intended to provide us with additional flexibility to access capital markets for general corporate purposes, subject to market conditions and our capital needs.
31
On July 3, 2013, we completed a public offering under the Shelf Registration in which we sold 1,730,000 shares of common stock and warrants to purchase up to 865,000 shares of common stock and received net proceeds of $1.7 million after deducting discounts and commissions to the underwriter and offering expenses. During the year ended December 31, 2014, these warrant holders exercised an aggregate of 800,000 of warrants for gross proceeds of $1.0 million. Also, in July 2013, we also sold 54,347 shares of common stock to one of our directors in a private placement, pursuant to an agreement dated June 28, 2013, and received proceeds of $0.1 million. For additional information, refer to Note 10, Stockholders Equity and Note 11, Warrants.
On April 4, 2014, we completed a registered direct offering under the Shelf Registration in which we sold 2,030,000 shares of common stock and warrants to purchase 812,000 shares of common stock and received net proceeds of $6.1 million after deducting placement agent fees and other offering expenses. For additional information, refer to Note 10, Stockholders Equity and Note 11, Warrants.
On October 20, 2014, we sold our Reno Business for $1.3 million in cash. For additional information, refer to Note 2, Significant Accounting Policies, Note 9, Debt and Note 18, Discontinued Operations.
On November 4, 2014, we completed a registered direct offering under the Shelf Registration in which we sold 1,385,000 shares of common stock, Series A Warrants to purchase up to an aggregate of 388,393 shares of common stock, and Series B Warrants to purchase up to an aggregate of 168,571 shares of common stock. We received net proceeds of $3.8 million after deducting placement agent fees and other estimated offering expenses. For additional information, refer to Note 10, Stockholders Equity and Note 11, Warrants.
On November 11, 2014, we and Kanis S.A. entered into a letter agreement whereby Kanis S.A. agreed to amend the terms of the outstanding loans made to us, such that (i) the maturity dates of all outstanding loans were extended to October 1, 2016; and (ii) the early redemption feature applicable to one of the outstanding loans was removed. For additional information, refer to Note 10, Stockholders Equity and Note 11, Warrants.
We continue to pursue revenue generating opportunities relating to special government mandated retrofit programs in California and potentially others in various jurisdictions domestically and internationally. Opportunities such as these require cash investment in operating expenses and working capital such as inventory and receivables prior to realizing profits and cash from sales. Additionally, as previously discussed, we intend to pursue aggressive development of our materials science platform which will require cash investment.
We had $7.2 million in cash at December 31, 2014 compared to $3.9 million at December 31, 2013. Based on our current cash levels and expected cash flows from operations, we believe our current cash position is not sufficient to fund our cash requirements during the next twelve months. Our credit facility with FGI is a demand facility, which can be cancelled at any time by FGI. As such, we may seek additional financing in the form of funding from outside sources. There is no assurance that we will be able to raise additional funds or reduce our discretionary spending at a level sufficient for our working capital needs. These matters raise substantial doubt about our ability to continue as a going concern.
The following table and discussion summarizes our cash flows from continuing operations for the years ended December 31, 2014 and 2013.
Our primary uses of cash for operating activities are for purchasing inventory in support of the products that we sell, personnel related expenditures, facilities costs and payments for general operating matters. The increase in cash used in operating activities was primarily attributable to the operational impact of increased on-hand inventory resulting from a sharp downturn in retrofit demand coupled with DuraFit sales that have not yet begun to ramp. Additionally, we experienced an increase in tax obligations associated with a foreign location.
The increase in net cash provided by investing activities is primarily attributable to the sale of the Reno Business, the sale of a building at one of our foreign locations and completing the dissolution of a joint venture with Pirelli during 2014.
32
The increase in net cash provided by financing activities is primarily attributable to our offerings of common stock and warrants under the Shelf Registration discussed above, net borrowings under our FGI facility and proceeds from the exercise of warrants and stock options.
Description of Indebtedness
|
December 31, |
||||
|
2014 |
|
2013 |
||
|
($ in thousands) |
||||
Line of credit with FGI |
$ |
2,841 |
|
$ |
2,258 |
$1.5 million, 8% shareholder note due 2016 |
|
1,598 |
|
|
1,586 |
$3.0 million, 8% subordinated convertible shareholder notes due 2016 |
|
2,947 |
|
|
3,000 |
$3.0 million, 8% shareholder note due 2016 |
|
2,931 |
|
|
2,963 |
Total borrowings |
$ |
10,317 |
|
$ |
9,807 |
We have a $7.5 million secured demand facility with FGI backed by our receivables and inventory. The FGI facility expires on August 15, 2015 and may be extended at our option for additional one-year terms. However, FGI can cancel the facility at any time.
Under the FGI facility, FGI can elect to purchase eligible accounts receivables from us and certain of our subsidiaries at up to 80% of the value of such receivables (retaining a 20% reserve). At FGIs election, FGI may advance us up to 80% of the value of any purchased accounts receivable, subject to the $7.5 million limit. Reserves retained by FGI on any purchased receivable are expected to be refunded to us net of interest and fees on advances once the receivables are collected from customers. We may also borrow against eligible inventory up to the inventory sublimit as determined by FGI subject to the aggregate $7.5 million limit under the FGI facility and certain other conditions. At December 31, 2014, the inventory sublimit was the lesser of $1.5 million or 50% of the aggregate purchase price paid for accounts receivable purchased under the FGI facility. While the overall credit limit and inventory sublimit were not changed, in the first quarter of 2015, borrowing against Honda inventory has been limited to $0.2 million by FGI due to their concerns about customer concentration.
The interest rate on advances or borrowings under the FGI facility is the greater of (i) 6.50% per annum and (ii) 2.50% per annum above the prime rate, as defined in the FGI facility, and was 6.50% at December 31, 2014 and 2013.
We were in compliance with the terms of the FGI facility at December 31, 2014. However, t here is no guarantee that we will be able to borrow the full limit of $7.5 million if FGI chooses not to finance a portion of our receivables or inventory.
For additional information regarding our indebtedness, refer to Note 9, Debt.
Capital Expenditures
As of December 31, 2014, we had no material commitments for capital expenditures and no material commitments are anticipated in the near future.
Off-Balance Sheet Arrangements
As of December 31, 2014 and 2013, we had no off-balance sheet arrangements.
Commitments and Contingencies
As of December 31, 2014 and 2013, other than office leases, employment agreements with key executive officers and the obligation to fund our portion (5%) of the losses of our Asian investment, we had no material commitments other than the liabilities reflected in our consolidated financial statements included elsewhere in this Annual Report on Form 10-K. For additional information, refer to Note 16, "Commitments and Contingencies".
ITEM 7A. QUANTITATIVE AN QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Index to Financial Statements, located on page F-1 of this Annual Report on Form 10-K.
33
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
ITEM 9A. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures.
In evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Our management, with the participation our Chief Executive Officer and our Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this Annual Report on Form 10-K. Based on that evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that our disclosure controls and procedures were effective, at the reasonable assurance level, as of the end of the period covered by this report to ensure that information we are required to disclose in reports that we file or submit under the Securities Exchange Act of 1934 (1) is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, and (2) is accumulated and communicated to management, including our Chief Executive Officer and our Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
Managements Annual Report on Internal Control over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting. Our internal control over financial reporting is a process designed under the supervision of our principal executive and principal financial officers, or person performing similar functions, and effected by our board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of our financial statements for external reporting purposes in accordance with U.S. generally accepted accounting principles, or GAAP. A company's internal control over financial reporting includes those policies and procedures that:
· pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company;
· provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and the directors of the company; and
· provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company's assets that could have a material effect on the financial statements.
Because of inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management assessed the effectiveness of our internal control over financial reporting as of December 31, 2014. Management based this assessment on criteria for effective internal control over financial reporting described in Internal Control Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Management's assessment included an evaluation of the design of our internal control over financial reporting and testing of the operational effectiveness of its internal control over financial reporting. Management reviewed the results of its assessment with the Audit Committee of our Board of Directors.
Based on this assessment, management determined that, as of December 31, 2014, we maintained effective internal control over financial reporting.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting during our fourth fiscal quarter of 2014.
Auditor's Attestation
34
This annual report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting. Management's report was not subject to attestation by our registered public accounting firm pursuant to rules of the SEC that permit us to provide only management's report in this annual report.
ITEM 9B. OTHER INFORMATION
On March 13 , 2015 , Catalytic Solutions, Inc., one of our subsidiaries, entered into an amendment to certain of its agreements with TKK and TCC, including a purchase and sale agreement dated December 22, 2008, as amended, second purchase and sale agreement dated December 18, 2009 and new shareholders agreement dated December 18, 2009. The amendment generally permits us to sell certain products and technology in specified Asian countries, which we refer to as the Territory, pursuant to a royalty arrangement. Once an aggregate amount of approximately $16.6 million in royalties has been paid by us to TKK, we may generally commercialize any technology without a royalty, including inside the Territory. Royalty payments payable by us to TKK must be made within 30 days after the end of each calendar quarter and, if not paid by such time, may bear interest at a rate of 14% per annum at the election of TKK. The amendment also contains other provisions regarding confidentiality and retention and inspection of books and records. For additional information regarding the amendment and the parties relationship, refer to Item Part I, Item 1A. Risk FactorsWe are subject to restrictions and must pay a royalty on certain sales of our products and technology in specified countries in Asia." The foregoing description of the amendment is qualified in its entirety by reference to the terms of the amendment, a copy of which is attached as exhibit 10.44 to this Annual Report on Form 10-K and incorporated herein by reference.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Information required by this item regarding our directors and executive officers will be set forth under the captions Directors and Executive Officers of CDTi, Corporate GovernanceSection 16(a) Beneficial Ownership Reporting Compliance, Corporate GovernanceCode of Business Ethics and Conduct, Committees of the BoardCompensation and Nominating CommitteeNominating, Committees of the BoardAudit Committee in our proxy statement related to the 2015 annual meeting of stockholders and is incorporated by reference.
ITEM 11. EXECUTIVE COMPENSATION
Information required by this item will be set forth under the captions Executive Compensation and Director Compensation in the proxy statement related to the 2015 annual meeting of stockholders and is incorporated by reference.
Information required by this item will be set forth under the captions Principal Stockholders and Stock Ownership of Management and Executive CompensationEquity Compensation Plan Information in the proxy statement related to the 2015 annual meeting of stockholders and is incorporated by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Information required by this item will be set forth under the captions Corporate GovernanceTransactions with Related Parties and Role and Composition of the Board of DirectorsDirector Independence in the proxy statement related to the 2015 annual meeting of stockholders and is incorporated by reference.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Information required by this item will be set forth under the caption Proposal No. 2Ratification of Appointment of Independent Registered Public Accounting Firm in the proxy statement related to the 2015 annual meeting of stockholders and is incorporated by reference.
35
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a) Exhibits and Financial Statement Schedules:
(1) Financial Statements
See Index to Financial Statements located on page F-1 of this Annual Report on Form 10-K.
(2) Financial Statement Schedules
Not applicable
(3) Exhibits
See the exhibit index included herein.
36
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
CLEAN DIESEL TECHNOLOGIES, INC.
March 18 , 2015 By: /s/ Christopher J. Harris
Christopher J. Harris
President and Chief Executive Officer
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints David E. Shea and Pedro J. Lopez-Baldrich, and each of them, his or her true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him or her and in his or her name, place and stead, in any and all capacities, to sign any and all amendments to this Annual Report on Form 10-K, and to file the same, with all exhibits thereto and other documents in connection therewith the SEC, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully and to all intents and purposes as he or she might or could do in person hereby ratifying and confirming all that said attorneys-in-fact and agents, or his or her substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the registrant and in the capacities and on the dates indicated below.
/s/ Christopher J. Harris | President and Chief Executive Officer | Date: March 18 , 2015 | |
Christopher J. Harris | (Principal Executive Officer) | ||
/s/ David E. Shea | Chief Financial Officer | Date: March 18 , 2015 | |
David E. Shea | (Principal Financial and | ||
Accounting Officer) | |||
/s/ Charles R. Engles, Ph.D. | Chairman | Date: March 18 , 2015 | |
Charles R. Engles, Ph.D. | |||
/s/ Matthew Beale | Director | Date: March 18 , 2015 | |
Matthew Beale | |||
/s/ Till Becker, Ph.D. | Director | Date: March 18 , 2015 | |
Till Becker, Ph.D. | |||
/s/ Lon E. Bell, Ph.D. | Director | Date: March 18 , 2015 | |
Lon E. Bell, Ph.D | |||
/s/ Bernard H. (Bud) Cherry | Director | Date: March 18 , 2015 | |
Bernard H. (Bud) Cherry | |||
/s/ Mungo Park | Director | Date: March 18 , 2015 | |
Mungo Park |
Table of Contents
C LEAN DIESEL TECHNOLOGIES, INC.
Index to Financial Statements
F-1
Report of Independent Registered Public Accounting Firm
Board of Directors and Stockholders
Clean Diesel Technologies, Inc.
Oxnard, California
We have audited the accompanying consolidated balance sheets of Clean Diesel Technologies, Inc. as of December 31, 2014 and 2013 and the related consolidated statements of comprehensive loss, stockholders equity, and cash flows for each of the two years in the period ended December 31, 2014. These financial statements are the responsibility of the Companys management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Companys internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Clean Diesel Technologies, Inc. at December 31, 2014 and 2013, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2014 , in conformity with accounting principles generally accepted in the United States of America.
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As described in Note 1 to the consolidated financial statements, the Company has suffered recurring losses from operations and negative cash flows from operations since inception, resulting in an accumulated deficit of $191.1 million as of December 31, 2014, that raise substantial doubt about its ability to continue as a going concern. Managements plans in regard to these matters are also described in Note 1. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. Our opinion is not modified with respect to this matter.
/s/BDO USA, LLP
BDO USA, LLP
Los Angeles, California
March 18, 2015
|
December 31, |
||||
|
2014 |
|
2013 |
||
ASSETS |
|
|
|
|
|
Current assets: |
|
|
|
|
|
Cash |
$ |
7,220 |
|
$ |
3,909 |
Accounts receivable, net |
|
2,875 |
|
|
5,145 |
Inventories |
|
6,298 |
|
|
5,285 |
Prepaid expenses and other current assets |
|
2,130 |
|
|
1,428 |
Assets of discontinued operations held for sale |
|
- |
|
|
1,047 |
Total current assets |
|
18,523 |
|
|
16,814 |
Property and equipment, net |
|
1,357 |
|
|
1,372 |
Intangible assets, net |
|
2,662 |
|
|
3,438 |
Goodwill |
|
5,177 |
|
|
5,584 |
Other assets |
|
620 |
|
|
718 |
Assets of discontinued operations held for sale |
|
- |
|
|
443 |
Total assets |
$ |
28,339 |
|
$ |
28,369 |
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY |
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
Line of credit |
$ |
2,841 |
|
$ |
2,258 |
Accounts payable |
|
3,022 |
|
|
5,087 |
Accrued expenses and other current liabilities |
|
6,189 |
|
|
5,859 |
Income taxes payable |
|
1,459 |
|
|
1,058 |
Liabilities of discontinued operations held for sale |
|
- |
|
|
426 |
Total current liabilities |
|
13,511 |
|
|
14,688 |
Shareholder notes payable, noncurrent |
|
7,476 |
|
|
7,549 |
Deferred tax liability |
|
359 |
|
|
686 |
Total liabilities |
|
21,346 |
|
|
22,923 |
Commitments and contingencies (Note 16) |
|
|
|
|
|
Stockholders equity: |
|
|
|
|
|
Preferred stock, par value $0.01 per share: authorized 100,000; no shares issued and outstanding |
|
- |
|
|
- |
Common stock, par value $0.01 per share: authorized 24,000,000; issued and outstanding 14,152,772 and 9,299,253 shares at December 31, 2014 and 2013, respectively |
|
142 |
|
|
93 |
Additional paid-in capital |
|
200,771 |
|
|
188,108 |
Accumulated other comprehensive loss |
|
(2,865) |
|
|
(1,036) |
Accumulated deficit |
|
(191,055) |
|
|
(181,719) |
Total stockholders equity |
|
6,993 |
|
|
5,446 |
Total liabilities and stockholders equity |
$ |
28,339 |
|
$ |
28,369 |
See accompanying notes to the consolidated financial statements.
F-3
Table of Contents
CLEAN DIESEL TECHNOLOGIES, INC.
Consolidated Statements of Comprehensive Loss
(in thousands, except per share amounts)
|
Years Ended
December 31, |
||||
|
|||||
|
2014 |
|
2013 |
||
Revenues |
$ |
41,231 |
|
$ |
51,801 |
Cost of revenues |
|
28,778 |
|
|
36,840 |
Gross profit |
|
12,453 |
|
|
14,961 |
Operating expenses: |
|
|
|
|
|
Selling, general and administrative (including stock-based compensation expense of $592 and $661, respectively) |
|
12,374 |
|
|
13,339 |
Research and development (including stock-based compensation expense of $47 and $6, respectively) |
|
6,538 |
|
|
4,726 |
Severance and other charges |
|
1,166 |
|
|
1,239 |
Total operating expenses |
|
20,078 |
|
|
19,304 |
Loss from continuing operations |
|
(7,625) |
|
|
(4,343) |
Other expense: |
|
|
|
|
|
Interest expense |
|
(1,176) |
|
|
(1,404) |
Other expense, net |
|
(174) |
|
|
(756) |
Total other expense |
|
(1,350) |
|
|
(2,160) |
Loss from continuing operations before income taxes |
|
(8,975) |
|
|
(6,503) |
Income tax expense from continuing operations |
|
138 |
|
|
340 |
Net loss from continuing operations |
|
(9,113) |
|
|
(6,843) |
Net loss from discontinued operations |
|
(223) |
|
|
(255) |
Net loss |
|
(9,336) |
|
|
(7,098) |
Foreign currency translation adjustments |
|
(1 , 829) |
|
|
(924) |
Comprehensive loss |
$ |
(11,165) |
|
$ |
(8,022) |
|
|
|
|
|
|
Basic and diluted net loss per share: |
|
|
|
|
|
Net loss from continuing operations |
$ |
(0.76) |
|
$ |
(0.83) |
Net loss from discontinued operations |
|
(0.02) |
|
|
(0.03) |
Net loss |
$ |
(0.78) |
|
$ |
(0.86) |
Weighted-average number of common shares outstanding - basic and diluted |
|
12,005 |
|
|
8,285 |
See accompanying notes to the consolidated financial statements.
F-4
Table of Contents
CLEAN DIESEL TECHNOLOGIES, INC.
Consolidated Statements of Stockholders Equity
(in thousands)
|
Common Stock |
|
|
|
|
|
|
|
|
|
|
|
|
|||
|
Shares |
|
Amount |
|
Additional Paid-In Capital |
|
Accumulated Other Comprehensive Loss |
|
Accumulated Deficit |
|
Total Stockholders Equity |
|||||
Balance at December 31, 2012 |
7,254 |
|
$ |
73 |
|
$ |
186,106 |
|
$ |
(112) |
|
$ |
(174,621) |
|
$ |
11,446 |
Net loss |
- |
|
|
- |
|
|
- |
|
|
- |
|
|
(7,098) |
|
|
(7,098) |
Other comprehensive loss |
- |
|
|
- |
|
|
- |
|
|
(924) |
|
|
- |
|
|
(924) |
Proceeds from equity offering, net of costs |
1,730 |
|
|
17 |
|
|
1,106 |
|
|
- |
|
|
- |
|
|
1,123 |
Proceeds from private placement |
54 |
|
|
- |
|
|
99 |
|
|
- |
|
|
- |
|
|
99 |
Issuance of common stock as payment of accrued interest and payment premium on shareholder note |
188 |
|
|
2 |
|
|
160 |
|
|
- |
|
|
- |
|
|
162 |
Restricted stock unit vesting |
73 |
|
|
1 |
|
|
- |
|
|
- |
|
|
- |
|
|
1 |
Restricted stock units withheld for taxes |
- |
|
|
- |
|
|
(4) |
|
|
- |
|
|
- |
|
|
(4) |
Stock-based compensation |
- |
|
|
- |
|
|
641 |
|
|
- |
|
|
- |
|
|
641 |
Balance at December 31, 2013 |
9,299 |
|
|
93 |
|
|
188,108 |
|
|
(1,036) |
|
|
(181,719) |
|
|
5,446 |
Net loss |
- |
|
|
- |
|
|
- |
|
|
- |
|
|
(9,336) |
|
|
(9,336) |
Other comprehensive loss |
- |
|
|
- |
|
|
- |
|
|
(1,829) |
|
|
- |
|
|
(1,829) |
Proceeds from equity offerings, net of costs |
3,415 |
|
|
34 |
|
|
7,346 |
|
|
- |
|
|
- |
|
|
7,380 |
Issuance of common stock for settlement of litigation |
75 |
|
|
1 |
|
|
235 |
|
|
- |
|
|
- |
|
|
236 |
Exercise of warrants |
968 |
|
|
10 |
|
|
3,938 |
|
|
- |
|
|
- |
|
|
3,948 |
Exercise of stock options |
179 |
|
|
2 |
|
|
523 |
|
|
- |
|
|
- |
|
|
525 |
Restricted stock unit vesting |
217 |
|
|
2 |
|
|
- |
|
|
- |
|
|
- |
|
|
2 |
Restricted stock units withheld for taxes |
- |
|
|
- |
|
|
(18) |
|
|
- |
|
|
- |
|
|
(18) |
Stock-based compensation |
- |
|
|
- |
|
|
639 |
|
|
- |
|
|
- |
|
|
639 |
Balance at December 31, 2014 |
14,153 |
|
$ |
142 |
|
$ |
200,771 |
|
$ |
(2,865) |
|
$ |
(191,055) |
|
$ |
6,993 |
See accompanying notes to the consolidated financial statements.
F-5
CLEAN DIESEL TECHNOLOGIES, INC.
Consolidated Statements of Cash Flows
(in thousands)
|
Years Ended
December 31, |
||||
|
|||||
|
2014 |
|
2013 |
||
Cash flows from operating activities: |
|
|
|
|
|
Net loss |
$ |
(9,336) |
|
$ |
(7,098) |
Net loss from discontinued operations |
|
223 |
|
|
255 |
Adjustments to reconcile net loss to cash used in operating activities: |
|
|
|
|
|
Depreciation and amortization |
|
1,007 |
|
|
1,193 |
Write-down of excess and obsolete inventory |
|
4 |
|
|
491 |
Stock-based compensation expense |
|
639 |
|
|
667 |
Loss on change in fair value of liability-classified warrants |
|
506 |
|
|
180 |
Loss (income) from unconsolidated affiliates |
|
(46) |
|
|
561 |
Loss (gain) on foreign currency transactions |
|
(878) |
|
|
16 |
Loss related to litigation |
|
123 |
|
|
- |
Loss (gain) on disposal of property and equipment |
|
(294) |
|
|
18 |
Offering costs allocated to warrants issued |
|
293 |
|
|
123 |
Other |
|
(177) |
|
|
77 |
Changes in operating assets and liabilities: |
|
|
|
|
|
Accounts receivable |
|
2,024 |
|
|
(450) |
Inventories |
|
(1,359) |
|
|
2,037 |
Prepaid expenses and other assets |
|
(83) |
|
|
(149) |
Accounts payable |
|
(1,932) |
|
|
(186) |
Income taxes |
|
(189) |
|
|
1,057 |
Accrued expenses and other current liabilities |
|
(442) |
|
|
385 |
Cash used in operating activities of continuing operations |
|
(9,917) |
|
|
(823) |
Cash provided by (used in) operating activities of discontinued operations |
|
(15) |
|
|
392 |
Net cash used in operating activities |
|
(9,932) |
|
|
(431) |
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
Distribution from (investment in) unconsolidated affiliate |
|
91 |
|
|
(710) |
Purchases of property and equipment |
|
(454) |
|
|
(135) |
Proceeds from sale of business held for sale |
|
1,328 |
|
|
- |
Proceeds from sale of property and equipment |
|
307 |
|
|
- |
Cash provided by (used in) investing activities of continuing operations |
|
1,272 |
|
|
(845) |
Cash used in investing activities of discontinued operations |
|
(8) |
|
|
(7) |
Net cash provided by (used in) investing activities |
|
1,264 |
|
|
(852) |
Cash flows from financing activities: |
|
|
|
|
|
Net borrowings (payments) under demand line of credit |
|
584 |
|
|
(3,217) |
Proceeds from issuance of common stock and warrants, net of offering costs |
|
9,923 |
|
|
1,839 |
Proceeds from exercise of warrants |
|
1,000 |
|
|
- |
Proceeds from exercise of stock options |
|
525 |
|
|
- |
Other |
|
(18) |
|
|
(4) |
Net cash provided by (used in) financing activities |
|
12,014 |
|
|
(1,382) |
Effect of exchange rates on cash |
|
(35) |
|
|
(304) |
Net change in cash |
|
3,311 |
|
|
(2,969) |
Cash at beginning of year |
|
3,909 |
|
|
6,878 |
Cash at end of year |
$ |
7,220 |
|
$ |
3,909 |
Supplemental disclosures: |
|
|
|
|
|
Cash paid for interest |
$ |
1,107 |
|
$ |
1,193 |
Cash paid (received) for income taxes |
$ |
879 |
|
$ |
(372) |
Significant noncash financing activities: |
|
|
|
|
|
Issuance of warrants classified as derivative liability |
$ |
2,978 |
|
$ |
749 |
See accompanying notes to the consolidated financial statements.
F-6
At December 31 , 2014, the Company had $7.2 million in cash. Based on the Companys current cash levels and expected cash flows from operations, management believes that the current cash position is not sufficient to fund the Companys cash requirements during the next twelve months. The Companys credit facility with FGI is a demand facility, which can be cancelled at any time by FGI. As such, the Company may be forced to seek additional financing in the form of funding from outside sources. However, there is no assurance that the Company will be able to raise additional funds or reduce its discretionary spending to a level sufficient for its working capital needs. These matters raise substantial doubt about the Companys ability to continue as a going concern.
2. Significant Accounting Policies
a. Principles of Consolidation
The consolidated financial statements include the financial statements of the Company and its wholly owned subsidiaries. All significant inter-company balances and transactions have been eliminated in consolidation.
Investments in which the Company has at least a 20%, but not more than a 50% interest are generally accounted for under the equity method. Investment interests below 20% are generally accounted for under the cost method, except if the Company could exercise significant influence, the investment would be accounted for under the equity method. The Companys judgment regarding the level of influence over each equity method investment includes considering key factors such as the Companys ownership interest, representation on the board of directors, participation in policy-making decisions and material intercompany transactions. The Company has an investment interest below 20% which is accounted for under the equity method. The Company includes its proportionate share of the net income or loss of equity-method investees in its consolidated statements of comprehensive loss. For additional information, refer to Note 15, Equity Investments.
b. Discontinued Operations
In July 2014, the Company committed to a plan to sell substantially all of the assets of its Reno Business, and the sale of this business was completed in October 2014. The sale of this non-core business is expected to increase the Companys ability to fund key investments to broaden its growing intellectual property portfolio and to bring to market new products. The assets and liabilities of the Reno Business have been reclassified as held for sale and its operations are classified as discontinued operations for all periods presented in this report. Depreciation and amortization have been eliminated from discontinued operations from the date the Company committed to the plan to sell the Reno Business. In the statements of cash flows, the cash flows of discontinued operations are separately classified and aggregated.
Discontinued operations also includes accruals and related costs for the Companys estimated liability to settle its ongoing indemnification matters with Johnson Matthey (JM) associated with the sale of Applied Utility Systems, Inc. (AUS), a former subsidiary of the Company, in 2009.
For additional information, refer to Note 18, Discontinued Operations.
All discussions and amounts in the consolidated financial statements and related notes for all periods presented relate to continuing operations only, unless otherwise noted.
c. Concentration of Risk
For the years ended December 31, 2014 and 2013, one automotive original equipment manufacturer (OEM) customer within the Catalyst segment accounted for 52% and 41%, respectively, of the Companys revenues. This customer accounted for 50% and 26% of the Companys accounts receivable at December 31, 2014 and 2013, respectively.
For the periods presented below, certain vendors accounted for 10% or more of the Companys raw material purchases as follows:
F-8
|
|
|
|
Years Ended
December 31, |
||
|
|
|
|
|||
Vendor |
|
Supplies |
|
2014 |
|
2013 |
A |
|
Substrates |
|
27% |
|
18% |
B |
|
Substrates |
|
14% |
|
14% |
C |
|
Catalysts |
|
10% |
|
15% |
D |
|
Rare Earth Materials |
|
9% |
|
12% |
d. Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the U.S requires management of the Company to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent liabilities. These estimates and assumptions are based on managements best estimates and judgment. On an ongoing basis, the Company evaluates its estimates and assumptions, including those related to impairment of goodwill and long-lived assets, stock-based compensation, the fair value of financial instruments including warrants, allowance for doubtful accounts, inventory valuation, taxes and contingent and accrued liabilities. The Company bases its estimates on historical experience and various other factors, including the current economic environment, which it believes to be reasonable under the circumstances. Estimates and assumptions are adjusted when facts and circumstances dictate. Actual results may differ from these estimates under different assumptions and conditions. Management believes that the estimates are reasonable.
e. Cash
Cash consists of cash balances on hand and on deposit at banks. Cash on deposit at banks at times may exceed the FDIC limits. The Company believes no significant concentration of credit risk exists with respect to these cash balances.
f. Accounts Receivable
Accounts receivable are recorded at the invoiced amount and do not bear interest. Accounts receivable are presented net of a reserve for doubtful accounts of $0.3 million and $0.4 million at December 31, 2014 and 2013, respectively. The allowance for doubtful accounts is the Companys best estimate of the amount of probable credit losses in the Companys existing accounts receivable. The Company determines the allowance based on historical write-off experience and past due balances over 90 days that are reviewed individually for collectability. Account balances are charged off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote. The Company does not have any off balance sheet credit exposure related to its customer.
g. Inventories
Inventories are stated at the lower of cost (FIFO method) or market (net realizable value). Finished goods inventory includes materials, labor and manufacturing overhead. The Company establishes provisions for inventory that is obsolete or when quantities on hand are in excess of estimated forecasted demand. The creation of such provisions results in a write-down of inventory to net realizable value and a charge to cost of sales.
The Companys inventory includes precious metals (platinum, palladium and rhodium) for use in the manufacturing of catalysts. The precious metals are valued at the lower of cost or market, consistent with the Companys other inventory.
h. Property and Equipment
Property and equipment is capitalized at cost and is stated at cost less accumulated depreciation and amortization. Depreciation and amortization is determined using the straight line method over the estimated useful lives of the various asset classes. Machinery and equipment are depreciated over 2 to 10 years; furniture and fixtures, computer hardware and software and vehicles are depreciated over 2 to 5 years. Property and equipment held under capital leases and leasehold improvements are amortized over the shorter of estimated useful lives or the lease term. Repairs and maintenance are charged to expense as incurred and major replacements or betterments are capitalized.
F-9
Table of Contents
CLEAN DIESEL TECHNOLOGIES, INC.
Notes to Consolidated Financial Statements
i. Goodwill and Intangible Assets
Goodwill is the excess of the purchase price of an acquired entity over the fair value of net identified tangible and intangible assets acquired and is recorded in the reporting unit (operating segment or one level below operating segment) that is expected to benefit from the business combination. Goodwill is not amortized, but rather tested for impairment at least annually or more often whenever events or circumstances indicate that goodwill might be impaired. The Company performs its annual impairment test as of October 31.
Goodwill is tested at the reporting unit level using a two-step impairment test. The first step is to compare the fair value of the reporting unit to its carrying value, including goodwill. If the carrying value of the reporting unit exceeds the fair value, a second step is performed in order to determine the amount of impairment loss, if any. The second step compares the implied fair value of the reporting units goodwill with the carrying amount of that goodwill. If the carrying amount of the reporting units goodwill exceeds its implied fair value, an impairment charge is recognized in an amount equal to that excess. Prior to performing the two-step impairment test, the Company may make a qualitative assessment of the likelihood of goodwill impairment in order to determine whether a detailed quantitative analysis is required.
The Companys Engine Control Systems reporting unit, which is within its Heavy Duty Diesel Systems reporting segment, contains all of the Companys allocated goodwill. The Company performed Step 1 of the annual impairment test as of October 31, 2014 and determined that the fair value of the Companys reporting unit (as determined using income and market approaches) was substantially greater than the carrying amount of the respective reporting unit, including goodwill, and Step 2 was not necessary; therefore, there was no impairment to the carrying amount of the reporting units goodwill. The Company has recorded no impairment charges to date for this goodwill. T he Company also determined that no subsequent events through December 31, 2014 triggered additional impairment testing ; however, it is reasonably possible that future impairment tests may result in a different conclusion for the goodwill of the Engine Control Systems reporting unit. The estimate of fair value of the reporting units is sensitive to certain factors including but not limited to the following: movements in the Companys share price, changes in discount rates and its cost of capital, growth of the reporting units revenue, cost structure of the reporting unit, successful completion of research and development and customer acceptance of new products, expected changes in emissions regulations and approval of the reporting units product by regulatory agencies.
The Companys intangible assets consist of trade names, acquired patents and technology, and customer relationships and have finite lives. Intangible assets are carried at cost, less accumulated amortization. Amortization is computed on a straight-line or accelerated basis over the estimated useful lives of the respective assets, ranging from 4 to 20 years.
j. Long Lived Assets
Assets such as property and equipment and amortizable intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. An impairment loss is recognized when the sum of the expected undiscounted future net cash flows of an asset or asset group is less than its carrying amount and is measured as the amount by which the carrying amount of the asset or asset group exceeds its fair value.
k. Warrants and Derivative Liabilities
The Company accounts for the issuance of Company derivative equity instruments in accordance with Accounting Standards Codification (ASC) 815-40 Derivative and Hedging. The Company reviews common stock purchase warrants at each balance sheet date based upon the characteristics and provision of each particular instrument and classifies them on the balance sheet as:
· Equity if they (i) require physical settlement or net-share settlement, or (ii) give the Company a choice of net-cash settlement or settlement in the Companys own shares (physical settlement or net-share settlement), or as
· Liabilities if they (i) require net-cash settlement (including a requirement to net-cash settle the contract if an event occurs and if that event is outside the Companys control), or (ii) give the counterparty a choice of net-cash settlement or settlement in shares (physical settlement of net-share settlement).
The Company assesses classification of common stock purchase warrants and other freestanding derivatives at each reporting date to determine whether a change in classification between assets and liabilities and equity is required.
F-10
l. Income Taxes
Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance against deferred tax assets is required if, based on the weight of available evidence, it is more likely than not that some portion or all of the deferred tax assets will not be realized. The valuation allowance should be sufficient to reduce the deferred tax assets to the amount that is more likely than not to be realized.
The Company recognizes the effect of income tax positions only if those positions are more likely than not of being sustained. Changes in recognition or measurement are reflected in the period in which the change occurs. The Company records interest and penalties related to unrecognized tax benefit in income tax expense.
m. Revenue Recognition
Revenues are derived primarily from the sale of products. The Company generally recognizes revenue when products are shipped and the customer takes ownership and assumes risk of loss, collection of the relevant receivable is reasonably assured, persuasive evidence of an arrangement exists and the sales price is fixed or determinable. There are certain customers where risk of loss transfers at destination point and revenue is recognized when product is delivered to the destination. For these customers, revenue is recognized upon receipt at the customers warehouse. When terms of sale include subjective customer acceptance criteria, the Company defers revenue until the acceptance criteria are met. The determination of whether or not the customer acceptance terms are perfunctory or inconsequential impacts the amount and timing of the revenue recognized.
n. Cost of Revenue
Cost of revenue includes direct material costs and factory labor as well as factory overhead expense. Indirect factory expense includes the costs of freight (inbound and outbound for direct materials and finished goods, respectively), purchasing and receiving, inspection, testing, warehousing, utilities and depreciation of facilities and equipment utilized in the production and distribution of products.
o. Selling, General and Administrative Expense
Selling, general and administrative expense includes the salary and benefits for sales, marketing and administrative staff as well as samples provided at no-cost to customers, marketing materials, travel, legal, accounting and tax consulting. Also included is any depreciation related to assets utilized in selling, general and administrative functions as well as amortization of acquired intangible assets .
p. Research and Development
Research and development costs are generally expensed as incurred. These expenses include the salary and benefits for the research and development staff as well as travel, research materials, testing and legal expense related to patenting intellectual property. Also included is any depreciation related to assets utilized in the development of new products.
q. Stock-Based Compensation
Equity awards consist of stock options and restricted stock units (RSUs). The Company measures the compensation cost for all stock-based awards at fair value on the date of grant and recognizes it on a straight-line basis over the service period for awards expected to vest, which is generally three years.
The Company measures the fair value of stock options using the Black-Scholes option-pricing model and certain assumptions, including the expected life of the stock options, an expected forfeiture rate and the expected volatility of its common stock. The fair value of RSUs is based on the closing price of the Companys common stock on the grant date.
F-11
Table of Contents
CLEAN DIESEL TECHNOLOGIES, INC.
Notes to Consolidated Financial Statements
r. Product Warranty
The Company provides for the estimated cost of product warranties in cost of sales, at the time product revenue is recognized. Warranty costs are estimated primarily using historical warranty information in conjunction with current engineering assessments applied to the Companys expected repair or replacement costs.
s. Foreign Currency
T he functional currency of the Heavy Duty Diesel Systems divisions Engine Control Systems Limited subsidiary in Canada is the Canadian dollar, while that of its subsidiary Engine Control Systems Europe AB in Sweden is the Swedish krona and the divisions Clean Diesel Technologies Limited U.K. subsidiary, is the British pound sterling. The functional currency of the Catalyst divisions Japanese branch office and Asian investment is the Japanese Yen. Accordingly, the assets and liabilities of the foreign locations are translated into U.S. dollars at period-end exchange rates. Revenue and expense accounts are translated at the average exchange rates for the period. The resulting foreign currency exchange adjustments are charged or credited directly to other comprehensive income or loss as a separate component of stockholders equity. Unrealized foreign currency exchange gains and losses on certain intercompany transactions that are of a long-term investment nature (i.e. settlement is not planned or anticipated in the foreseeable future) are also recorded in other comprehensive income or loss in stockholders equity. Accumulated other comprehensive loss contained only foreign currency translation adjustments as of December 31, 2014 and 2013.
The Company has exposure to multiple currencies. The primary exposure is between the U.S. dollar, the Canadian dollar, the Euro, British pound sterling and Swedish krona. Gains and losses arising from transactions denominated in currencies other than the functional currency of the entity are included in other income (expense) in the consolidated statements of comprehensive loss. Gains and losses arising from transactions denominated in foreign currencies are primarily related to inter-company loans that have been determined to be temporary in nature, cash, accounts receivable and accounts payable denominated in non-functional currencies.
t. Net Loss per Share
Basic net loss per share is computed using the weighted average number of common shares outstanding during the period. Diluted net loss per share is computed using the weighted average number of common shares and dilutive potential common shares. Dilutive potential common shares include employee stock options, RSUs, warrants and debt that are convertible into the Companys common stock.
Diluted net loss per share excludes certain dilutive potential common shares outstanding as their effect is anti-dilutive. Because the Company incurred net losses in the years ended December 31, 2014 and 2013, the effect of potentially dilutive securities has been excluded in the computation of net loss per share as their impact would be anti-dilutive. Potentially dilutive common stock equivalents excluded were 2.3 million and 2.6 million shares during the years ended December 31, 2014 and 2013, respectively.
u. Fair Value Measurements
Fair value is defined as an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset and liability. As a basis for considering such assumptions, a fair value hierarchy has been established that prioritizes the inputs used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (level 1 measurement) and the lowest priority to unobservable inputs (level 3 measurements). The three levels of the fair value hierarchy are as follows:
· Level 1: Quoted prices (unadjusted) in active markets for identical assets or liabilities;
· Level 2: Inputs other than quoted prices included within Level 1 that are either directly or indirectly observable including quoted prices for similar instruments in active markets and quoted prices for identical or similar instruments in markets that are not active; and
· Level 3: Unobservable inputs in which little or no market activity exists, therefore requiring an entity to develop its own assumptions about the assumptions that market participants would use in pricing.
The Company records its liability-classified warrants at fair value in accordance with the fair value measurement framework. The valuation inputs hierarchy classification for the warrant liability measured at fair value on a recurring basis is summarized as follows (in thousands):
Warrant Liability |
|
Level 1 |
|
Level 2 |
|
Level 3 |
|
December 31, 2014 |
|
- |
|
- |
|
$ |
1,474 |
December 31, 2013 |
|
- |
|
- |
|
$ |
939 |
F-12
The following is a reconciliation of the warrant liability measured at fair value using Level 3 inputs (in thousands):
|
Years Ended
December 31, |
||||
|
|||||
|
2014 |
|
2013 |
||
Balance at beginning of period |
$ |
939 |
|
$ |
10 |
Issuance of common stock warrants |
|
2,978 |
|
|
749 |
Exercise of common stock warrants |
|
(2,949) |
|
|
- |
Remeasurement of common stock warrants |
|
506 |
|
|
180 |
Balance at end of period |
$ |
1,474 |
|
$ |
939 |
For additional information regarding the liability-classified warrants, refer to Note 11, Warrants.
v. Fair Value of Financial Instruments
ASC Topic 825, Financial Instruments, requires disclosure of the fair value of financial instruments for which the determination of fair value is practicable. The fair values of the Companys cash, trade accounts receivable, prepaid expenses and other current assets, accounts payable and accrued expenses and other current liabilities approximate carrying values due to the short maturity of these instruments. The fair value of borrowings under the line of credit approximates their carrying value due to the variable interest rates. The fair value of shareholder notes payable, calculated using level 3 inputs, including a Black-Scholes option-pricing model to value the debts conversion factor and a net present value model, was $7.7 million and $7.5 million at December 31, 2014 and 2013, respectively.
w. Reclassifications
Certain prior-period amounts have been reclassified to conform to the current period presentation. These changes had no impact on the previously reported consolidated results of operations or stockholders' equity.
x. Recently Issued Accounting Guidance
In April 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-08, "Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity". ASU 2014-08 raises the threshold for a disposal to qualify as a discontinued operation and requires new disclosures of both discontinued operations and certain other disposals that do not meet the definition of a discontinued operation. It is effective for annual reporting periods beginning on or after December 15, 2014. Early adoption is permitted but only for disposals that have not been reported in financial statements previously issued. The Company has not elected to early adopt, and it does not expect the impact of the adoption of ASU 2014-08 to be material to its consolidated financial statements.
In May 2014, the FASB issued ASU No. 2014-09, "Revenue from Contracts with Customers". ASU 2014-09 supersedes the revenue recognition requirements in "Revenue Recognition (Topic 605)". ASU 2014-09 requires entities to recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods or services. It is effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. ASU 2014-09 provides for either full retrospective adoption or a modified retrospective adoption by which it is applied only to the most current period presented. Early adoption is not permitted. The Company is currently in the process of evaluating the impact of the adoption of ASU 2014-09 on its consolidated financial statements.
In August 2014, the FASB issued ASU No. 2014-15, Presentation of Financial Statements-Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entitys Ability to Continue as a Going Concern. ASU 2014-15 defines management's responsibility to assess an entity's ability to continue as a going concern, and to provide related footnote disclosures in certain circumstances. It is effective for annual reporting periods ending after December 15, 2016, and for annual and interim reporting periods thereafter. Early adoption is permitted. The Company is currently in the process of evaluating the impact of the adoption of ASU 2014-15 on its consolidated financial statements.
3. Inventories
Inventories consist of the following (in thousands):
|
|
|
|
|
|
|
December 31, |
||||
|
2014 |
|
2013 |
||
Raw materials |
$ |
2,744 |
|
$ |
2,637 |
Work in process |
|
902 |
|
|
981 |
Finished goods |
|
2,652 |
|
|
1,667 |
|
$ |
6,298 |
|
$ |
5,285 |
4. Property and Equipment
Property and equipment consists of the following (in thousands):
|
December 31 , |
||||
|
2014 |
|
2013 |
||
Buildings and improvements |
$ |
233 |
|
$ |
676 |
Furniture and fixtures |
|
2,242 |
|
|
2,335 |
Computer hardware and software |
|
1,398 |
|
|
1,430 |
Machinery and equipment |
|
11,796 |
|
|
11,591 |
Vehicles |
|
58 |
|
|
37 |
|
|
15,727 |
|
|
16,069 |
Less accumulated depreciation |
|
(14,370) |
|
|
(14,697) |
|
$ |
1,357 |
|
$ |
1,372 |
Depreciation expense was $0.4 million and $0.5 million for the years ended December 31, 2014 and 2013, respectively.
5. Goodwill and Intangible Assets
Goodwill
The Companys Engine Control Systems reporting unit, which is within its Heavy Duty Diesel Systems reporting segment, contains all of the Companys allocated goodwill. The changes in the carrying amount of goodwill are as follows (in thousands):
December 31, 2012 |
$ |
5,801 |
Effect of translation adjustment |
|
(217) |
December 31, 2013 |
|
5,584 |
Effect of translation adjustment |
|
(407) |
December 31, 2014 |
$ |
5,177 |
F-14
CLEAN DIESEL TECHNOLOGIES, INC.
Notes to Consolidated Financial Statements
Intangible Assets
Intangible assets consist of the following (in thousands):
|
Useful Life in Years |
|
December 31, |
||||
|
|
2014 |
|
2013 |
|||
Trade name |
15 - 20 |
|
$ |
1,293 |
|
$ |
1,352 |
Patents and know-how |
5 - 12 |
|
|
4,529 |
|
|
4,814 |
Customer relationships |
4 - 8 |
|
|
837 |
|
|
940 |
|
|
|
|
6,659 |
|
|
7,106 |
Less accumulated amortization |
|
|
|
(3,997) |
|
|
(3,668) |
|
|
|
$ |
2,662 |
|
$ |
3,438 |
Amortization expense was $0.6 million and $0.7 million for the years ended December 31, 2014 and 2013, respectively. Estimated amortization expense for existing intangible assets for each of the next five years is as follows (in thousands):
Years ending December 31 |
|
|
2015 |
$ |
594 |
2016 |
$ |
492 |
2017 |
$ |
482 |
2018 |
$ |
166 |
2019 |
$ |
166 |
6. Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities consist of the following (in thousands):
F-15
Table of Contents
CLEAN DIESEL TECHNOLOGIES, INC.
Notes to Consolidated Financial Statements
7. Severance and Other Charges
Severance and other charges consist of the following (in thousands):
|
Years Ended
December 31, |
||||
|
|||||
|
2014 |
|
2013 |
||
Employee severance expense |
$ |
784 |
|
$ |
596 |
Lease exit costs |
|
117 |
|
|
27 |
Legal settlements (1) |
|
265 |
|
|
616 |
Total severance and other charges |
$ |
1,166 |
|
$ |
1,239 |
|
|
|
|
|
|
(1) For additional information, refer to Note 16, "Commitments and Contingencies". |
|
|
|
|
|
Additionally, the Company also incurred $0.1 million related to the settlement |
|
|
|
|
|
of a customer dispute during the year ended December 31, 2014. |
|
|
|
|
|
The Company incurred severance costs in 2013 related to its North American, European and Asian locations, including severance benefits covering a one year period for its former chief executive officer, pursuant to a separation and release agreement. The Company also incurred lease termination costs related to the exit of a lease in North America and asset impairment expense related to the exit of this facility as well as to the exit of a leased facility in the U.K.
The Company incurred severance costs in 2014 related to its North American and U.K. locations, including severance benefits covering a one year period for its former chief financial officer, pursuant to a separation and release agreement. The Company incurred additional lease exit costs related to the exit of leases in North America.
The following summarizes the activity in the Companys accrual for severance and other exit costs (in thousands):
|
|
|
|
Lease Exit Costs |
|
|
|
|
|
Severance |
|
|
Total |
||||
December 31, 2012 |
$ |
306 |
|
$ |
184 |
|
$ |
490 |
Provision |
|
596 |
|
|
27 |
|
|
623 |
Payments |
|
(372) |
|
|
(211) |
|
|
(583) |
December 31, 2013 |
$ |
530 |
|
$ |
- |
|
$ |
530 |
Provision |
|
784 |
|
|
117 |
|
|
901 |
Payments |
|
(791) |
|
|
(38) |
|
|
(829) |
December 31, 2014 |
$ |
523 |
|
$ |
79 |
|
$ |
602 |
The Company expects to pay all of these amounts during the year ended December 31, 2015.
8. Accrued Warranty
Accrued warranty is as follows (in thousands):
|
Years Ended
December 31, |
||||
|
|||||
|
2014 |
|
2013 |
||
Balance at beginning of period |
$ |
453 |
|
$ |
665 |
Accrued warranty expense |
|
480 |
|
|
540 |
Warranty claims paid |
|
(524) |
|
|
(707) |
Translation adjustment |
|
(36) |
|
|
(45) |
Balance at end of period |
$ |
373 |
|
$ |
453 |
F-16
Table of Contents
CLEAN DIESEL TECHNOLOGIES, INC.
Notes to Consolidated Financial Statements
9. Debt
Debt consists of the following (in thousands):
|
|
December 31, 2014 |
|
December 31, 2013 |
||
|
|
|
||||
Line of credit with FGI |
|
$ |
2,841 |
|
$ |
2,258 |
$1.5 million, 8% shareholder note due 2016 (1) |
|
|
1,598 |
|
|
1,586 |
$3.0 million, 8% subordinated convertible shareholder notes due 2016 (1) |
|
|
2,947 |
|
|
3,000 |
$3.0 million, 8% shareholder note due 2016 (1) |
|
|
2,931 |
|
|
2,963 |
|
|
|
10,317 |
|
|
9,807 |
Less current portion |
|
|
(2,841) |
|
|
(2,258) |
|
|
$ |
7,476 |
|
$ |
7,549 |
|
|
|
|
|
|
|
(1) Debt discounts relate to warrants issued with shareholder notes and amendments. The aggregate amount of |
||||||
unamortized debt discount was $0.2 and $0.1 million at December 31, 2014 and 2013, respectively. For additional |
||||||
information, refer to the respective discussions below. |
|
|
|
|
|
|
Line of Credit with FGI
On February 14, 2011, the Company and certain of its subsidiaries (the Credit Subsidiaries) entered into Sale and Security Agreements with FGI to provide for a $7.5 million secured demand facility backed by its receivables and inventory. The Company and the Credit Subsidiaries also entered into guarantees to guarantee the performance of their obligations under the Sale and Security Agreements. The Company also granted FGI a first lien collateral interest in substantially all of its assets. On August 15, 2012, the Company and FGI agreed to amend the FGI facility. As amended, the initial term was extended from February 14, 2013 to August 15, 2015 and may be extended at the Companys option for additional one-year terms. However, FGI can cancel the facility at any time.
In connection with the sale of the Reno Business, the Companys Reno, Nevada subsidiary and FGI entered into an agreement, dated October 15, 2014 (the Termination Agreement), to terminate the Sale of Accounts and Security Agreement, dated February 14, 2011, among the Company subsidiary and FGI, as amended (the Reno-FGI Financing Agreement). Pursuant to the Termination Agreement, the Company was required to make a final payment of $0.4 million and FGI agreed to release all encumbrances on the Reno Business personal property under the Reno-FGI Financing Agreement.
Under the FGI facility, FGI can elect to purchase eligible accounts receivables from the Company and the Credit Subsidiaries at up to 80% of the value of such receivables (retaining a 20% reserve). Purchased receivables are subject to full recourse to the Company in the event of nonpayment by the customer. FGI becomes responsible for the servicing and administration of the accounts receivable purchased. The Company is not obligated to offer accounts in any month and FGI has the right to decline to purchase any accounts. At FGIs election, FGI may advance the Company up to 80% of the value of any purchased accounts receivable, subject to the $7.5 million limit. Reserves retained by FGI on any purchased receivable are expected to be refunded to the Company net of interest and fees on advances once the receivables are collected from customers. The Company may also borrow against eligible inventory up to the inventory sublimit, as determined by FGI, subject to the aggregate $7.5 million limit under the FGI facility and certain other conditions. At December 31, 2014, the inventory sublimit amount was the lesser of $1.5 million or 50% of the aggregate purchase price paid for accounts receivable purchased under the FGI facility. While the overall credit limit and the inventory sublimit were not changed, borrowing against the Companys significant OEM customers inventory has been limited to $0.2 million by FGI due to their concerns about customer concentration as of December 31, 2014.
The interest rate on advances or borrowings under the FGI facility is the greater of (i) 6.50% per annum and (ii) 2.50% per annum above the prime rate, as defined in the FGI facility and was 6.50% at December 31, 2014 and 2013. Any advances or borrowings under the FGI facility are due on demand. The Company also agreed to pay FGI collateral management fees of 0.30% per month on the face amount of eligible receivables as to which advances have been made and 0.38% per month on borrowings against inventory, if any. At any time outstanding advances or borrowings under the FGI facility are less than $2.4 million, the Company agreed to pay FGI standby fees of (i) the interest rate on the difference between $2.4 million and the average outstanding amounts and (ii) 0.44% per month on 80% of the amount by which advances or borrowings are less than the agreed $2.4 million minimum.
The Company paid FGI a one-time facility fee of $75,000 upon entry into the FGI facility and $75,000 upon amending the FGI facility. If the Company terminates the FGI facility prior to the last day of the initial term, as extended, or any additional term, it must pay a termination fee of 2% of the facility limit then in effect. No termination fee will be due if the Company notifies FGI of its intent to terminate within 10 days of FGI increasing the reserve percentage for accounts to greater than 40% for more than 30 consecutive days. FGI may terminate the facility at any time. The termination fee is not payable upon a termination by FGI or upon non-renewal.
F-17
There is no prepayment penalty. The Convertible Notes are unsecured obligations of the Company and subordinated to existing and future secured indebtedness of the Company.
The outstanding principal balance of the Convertible Notes plus accrued and unpaid interest were convertible into shares of the Companys common stock at an initial conversion price equal to $7.044 per share, which was 120% of the closing bid price per share of the Companys common stock on April 8, 2011, into no more than 369,853 shares. The Company evaluated the Convertible Notes and determined that there were no embedded derivatives contained in the Convertible Notes that require separate accounting. Additionally, there was no beneficial conversion feature associated with the Convertible Notes since the conversion price was not lower than the estimated fair market value of the Companys common stock on the issuance date. As such, the entire proceeds from the Convertible Notes are recorded as debt in the consolidated balance sheets.
On July 27, 2012, the Company and Kanis S.A. further amended the terms of the Convertible Notes to modify the conversion feature. As amended, the outstanding principal balance of the Convertible Notes, and accrued and unpaid interest are convertible, at the option of Kanis S.A., at any time upon written notice given not less than 75 calendar days prior to the date of conversion, into no more than 250,000 shares of the Companys common stock at a conversion price of $4.00 per share. The Company evaluated the modification and determined that the modification was not substantial and did not qualify as a debt extinguishment. Accordingly, no gain or loss was recognized from the modification.
In connection with the February 16, 2012 amendment, the Company issued to Kanis S.A. warrants to acquire 5,000 shares of its common stock at $3.80 per share. The warrants are exercisable on or after August 16, 2014 and expire on the earlier of (i) August 16, 2017 or (ii) that date that is 30 days after the Company gives notice to the warrant holder that the market value of one share of its common stock has exceeded 130% of the exercise price of the warrant for 10 consecutive days on or after August 16, 2014. The Company did not receive any cash consideration for the issuance of the warrants. The Company relied on the private placement exemption provided by Regulation S.
In connection with a letter agreement, dated November 11, 2014, the Company issued Kanis S.A. warrants to acquire 80,000 shares of its common stock at $1.75 per share. For additional information regarding this recent issuance of warrants, refer to Note 10, Stockholders Equity. The relative estimated fair value of this warrant issuance represents a discount from the face amount of the loan and has been recorded as a discount from the loan amount as of the issuance date. The discount is being amortized using the effective interest method over the remaining term of the loan.
$3.0 Million, 8% Shareholder Note Due 2016
On July 27, 2012, the Company executed a Loan Commitment Letter with Kanis S.A., pursuant to which the Company issued a promissory note in the principal amount of $3.0 million, which bears interest at 8% per annum, payable quarterly in arrears. The promissory note matures on July 27, 2015. There is no prepayment penalty or premium, and the promissory note is unsecured. On November 11, 2014, the Company entered into a letter agreement with Kanis S.A., whereby Kanis S.A. agreed to amend the terms of this loan, such that the maturity date was extended to October 1, 2016.
In connection with the promissory note, the Company issued Kanis S.A. a warrant to acquire 45,000 shares of its common stock at $2.09 per share, a third of which becomes exercisable on the issuance date and each of the first and second anniversaries of the issuance date. This warrant expires on July 27, 2018. The Company did not receive any cash consideration for the issuance of this warrant, which was issued in reliance upon the private placement exemption provided by Regulation S. In connection with a letter agreement, dated November 11, 2014, the Company issued Kanis S.A. warrants to acquire 80,000 shares of its common stock at $1.75 per share. For additional information regarding this recent issuance of warrants, refer to Note 10, Stockholders Equity. The relative estimated fair values of these warrant issuances represent a discount from the face amount of the loan which has been recorded as of the respective issuance dates. The discount is being amortized using the effective interest method over the remaining term of the loan.
Annual scheduled principal payments of debt based on earliest redemption date as of December 31, 2014 are (in thousands):
F-19
10. Stockholders Equity
Shelf Registration
On May 15, 2012, the Company filed a Shelf Registration which was declared effective by the SEC on May 21, 2012. The Shelf Registration permits the Company to sell, from time to time, up to an aggregate of $50.0 million of various securities, including common stock, preferred stock, warrants to purchase common stock or preferred stock and units consisting of one or more shares of common stock, shares of preferred stock, warrants, or any combination of such securities. However, the Company may not sell its securities in a primary offering pursuant to the Shelf Registration or any other registration statement on Form S-3 with a value exceeding one-third of its public float in any 12-month period (unless the Companys public float rises to $75.0 million or more). The Shelf Registration is intended to provide the Company with additional flexibility to access capital markets for general corporate purposes, subject to market conditions and the Company's capital needs.
July 2013 Offering
On June 28, 2013, the Company entered into an underwriting agreement (the Underwriting Agreement) with Roth Capital Partners, LLC, (the Underwriter) related to the public offering of an aggregate 1,600,000 shares of the Companys common stock together with warrants to purchase up to 800,000 shares of common stock. The Underwriters were also granted a 30 day option to purchase up to an additional 240,000 shares of common stock and/or warrants to purchase up to an additional 120,000 shares of common stock to cover overallotments, if any. This offering was made pursuant to the Companys Shelf Registration. On July 3, 2013, the Company closed the offering (the July Offering) in which it sold 1,730,000 shares of common stock at a price of $1.245 per share and warrants to purchase up to 865,000 shares at a price per warrant of $0.01, including 130,000 shares and 65,000 warrants upon partial exercise of the Underwriters over-allotment option. The securities were sold in units consisting of one share of common stock and 0.5 of one warrant to purchase one share of common stock for a price of $1.25 per unit.
The Company received gross proceeds of $2.2 million and net proceeds of $1.7 million after deducting discounts and commissions to the Underwriter and offering expenses. The July Offering warrants are within the scope of ASC 815-40 and are required to be recorded as liabilities. Accordingly, of the $1.7 million in net proceeds, $1.0 million was allocated to the common stock and included in additional paid-in capital and $0.7 million was allocated to the warrant liability based on the fair value of the warrants on the issuance date. Additionally, $0.1 million of the underwriting discounts and commissions and offering costs were allocated to the warrants, based on the relative fair value of the July Offering warrants and the common stock on the issuance date, and was included in other expense, net in the accompanying statement of comprehensive loss for the year ended December 31, 2013. The Company used the net proceeds for general corporate purposes, including working capital, general and administrative expenses, capital expenditures and implementation of its strategic priorities, and to repay a portion of amounts outstanding under its line of credit.
In accordance with the Underwriting Agreement, the Company issued the Underwriter a warrants to purchase in aggregate 34,600 shares of the Companys common stock with an exercise price of $1.25 per share. The warrants are exercisable beginning on December 25, 2013 through June 28, 2018. The fair value of these warrants approximated zero.
April 2014 Offering
On April 1, 2014, the Company entered into subscription agreements with certain investors who agreed to purchase an aggregate of 2,030,000 shares of the Companys common stock together with warrants to purchase up to 812,000 shares of common stock (the April Offering). This offering was made pursuant to the Companys Shelf Registration, and closed on April 4, 2014. The securities were sold in units consisting of one share of common stock and 0.4 of a warrant to purchase one share of common stock for a price of $3.40 per unit.
F-20
The Company received gross proceeds of $6.9 million and net proceeds of $6.1 million after deducting placement agent fees and other offering expenses. The April Offering warrants are within the scope of ASC 815-40 and are required to be recorded as liabilities. Accordingly, of the $6.1 million in net proceeds, $4.6 million was allocated to the common stock and included in additional paid-in capital and $1.5 million was allocated to the warrant liability based on the fair value of the warrants on the issuance date. Additionally, $0.2 million of the placement agent fees and other offering costs were allocated to the warrants, based on the relative fair value of the April Offering warrants and the common stock on the issuance date, and was included in other expense, net in the accompanying statement of comprehensive loss for the year ended December 31, 2014. The Company used the net proceeds for general corporate purposes, including working capital, general and administrative expenses, capital expenditures and implementation of its strategic priorities, and to repay a portion of amounts outstanding under its line of credit.
November 2014 Offering
On November 4, 2014, the Company entered into subscription agreements with certain investors who agreed to purchase an aggregate of 1,385,000 shares of the Companys common stock, Series A Warrants to purchase up to an aggregate of 388,393 shares of common stock with an exercise price of $3.25 per share, for a combined purchase price of $2.80 per share and 0.28 of one Series A Warrant, and Series B Warrants to purchase up to an aggregate of 168,571 shares of common stock with an exercise price of $0.01 per share for a purchase price of $2.79 per Series B Warrant, pursuant to the Shelf Registration (the November Offering).
The Company received gross proceeds of $4.4 million and net proceeds of $3.8 million after deducting placement agent fees and other offering expenses. The November Offering warrants are within the scope of ASC 815-40 and are required to be recorded as liabilities. Accordingly, of the $3.8 million in net proceeds, $2.5 million was allocated to the common stock and included in additional paid-in capital and $1.3 million was allocated to the warrant liability based on the fair value of the warrants on the issuance date. Additionally, $0.1 million of the placement agent fees and other offering costs were allocated to the warrants, based on the relative fair value of the November Offering warrants and the common stock on the issuance date, and was included in other expense, net in the accompanying statement of comprehensive loss for the year ended December 31, 2014. The Company intends to use the net proceeds for general corporate purposes, which may include working capital, general and administrative expenses, capital expenditures and implementation of its strategic priorities. The Company may also use a portion of the net proceeds to acquire or invest in businesses, products and technologies that are complementary to its current business, although there are no present commitments or agreements for any such transactions.
Other Issuances of Common Stock and Warrants
On June 28, 2013, the Company and one of its directors entered into an agreement pursuant to which the director agreed to purchase $0.1 million of the Companys common stock in a private placement at a price of $1.84 per share, the closing bid price on the day preceding the date of the agreement. In July 2013, the Company issued 54,347 shares of common stock to the director under this agreement.
Concurrent with its public offering of common stock, on July 3, 2013, the Company paid $235,000 of premium and interest due June 30, 2013, pursuant to loans made to the Company by Kanis S.A., with 188,000 shares of common stock and warrants to purchase 94,000 shares of common stock. The warrants have an exercise price of $1.25 per share, and are exercisable immediately for a period of five years. The Company relied on the private placement exemption provided by Regulation S.
In connection with a letter agreement, dated November 11, 2014, the Company issued Kanis S.A. warrants to acquire 80,000 shares of its common stock at $1.75 per share for a five year period. The Company did not receive any cash consideration for the issuance of this warrant, which was issued in reliance upon the private placement exemption provided by Regulation S. For additional information, refer to Note 9, Debt.
For additional information on the warrant issuances discussed within this Note, refer to Note 11, Warrants.
Common Stock Purchase Agreement with Lincoln Park Capital (LPC)
On October 7, 2011, the Company signed a purchase agreement with LPC, together with a registration rights agreement, whereby LPC agreed to purchase up to $10.0 million of the Companys common stock over a 30-month period ending April 24, 2014. These agreements expired unused.
F-21
Table of Contents
CLEAN DIESEL TECHNOLOGIES, INC.
Notes to Consolidated Financial Statements
11. Warrants
From time to time, the Company issues warrants to purchase its common stock. Warrants have been issued for consulting services, in connection with the Companys issuance of debt and sales of its common stock. For additional information regarding the warrants discussed in this Note, refer to Note 10, Stockholders Equity.
Warrant activity is summarized as follows:
Warrant Classification
The Company evaluated the following warrants on issuance and at each reporting date to determine proper classification as equity or as a liability.
Warrant Liability
The Companys warrant liability is carried at fair value and is classified as Level 3 in the fair value hierarchy because the warrants are valued based on unobservable inputs.
The Company determines the fair value of its warrant liability using the Black-Scholes option-pricing model unless the awards are subject to market conditions, in which case it uses a Monte Carlo simulation model, which utilizes multiple input variables to estimate the probability that market conditions will be achieved. These models are dependent on several variables such as the instruments expected term, expected strike price, expected risk-free interest rate over the expected term of the instrument, expected dividend yield rate over the expected term and the expected volatility. The expected strike price for warrants with full-ratchet down-round price protection is based on a weighted average probability analysis of the strike price changes expected during the term as a result of the full-ratchet down-round price protection.
F-22
Due to the significant change in the Company following its business combination with Catalytic Solutions, Inc. (the Merger), CDTis pre-Merger historical price volatility was initially not considered representative of expected volatility going forward. Therefore, for warrants with an expected term that required a volatility look-back that pre-dates the Merger, the Company used an estimate based upon a weighted average of implied and historical volatility of a portfolio of peer companies and CDTis post-Merger historical volatility for the valuation of these warrants. For warrants with an expected term that does not require a volatility look-back that pre-dates the Merger, CDTis post-Merger historical price volatility was considered representative of expected volatility going forward, and accordingly, only CDTis historical volatility was used for the valuation of these warrants. The expected life is equal to the remaining contractual life of the warrants.
The assumptions used in the Black-Scholes option-pricing model to estimate the fair value of the warrant liability for the following warrants, as of their respective issuance dates, are as follows:
|
|
|
|
Issued April 4, 2014 |
|
|
December 31, 2014 |
|
|||
|
|
||||
Number of warrants |
|
812,000 |
|
|
812,000 |
CDTi stock price |
$ |
1.81 |
|
$ |
2.95 |
Strike price |
$ |
4.20 |
|
$ |
4.20 |
Expected volatility |
|
86.6% |
|
|
84.9% |
Risk-free interest rate |
|
1.6% |
|
|
1.9% |
Dividend yield |
|
- |
|
|
- |
Expected life in years |
|
4.8 |
|
|
5.5 |
|
December 31, 2014 |
|
Issued November 4, 2014 |
|||||
|
|
Series A |
|
Series B |
||||
Number of warrants |
|
388,393 |
|
|
388,393 |
|
|
168,571 |
CDTi stock price |
$ |
1.81 |
|
$ |
3.04 |
|
$ |
3.04 |
Strike price |
$ |
3.25 |
|
$ |
3.25 |
|
$ |
0.01 |
Expected volatility |
|
86.5% |
|
|
87.1% |
|
|
149.0% |
Risk-free interest rate |
|
1.6% |
|
|
1.6% |
|
|
0.1% |
Dividend yield |
|
- |
|
|
- |
|
|
- |
Expected life in years |
|
4.9 |
|
|
5.0 |
|
|
0.5 |
The assumptions used in the Monte Carlo simulation model to estimate the fair value of the warrant liability for the following warrants, as of their respective issuance dates, are as follows:
F-23
|
|
|
|
Issued November 11, 2014 |
|
|
December 31, 2014 |
|
|||
|
|
||||
Number of warrants |
|
80,000 |
|
|
80,000 |
CDTi stock price |
$ |
1.81 |
|
$ |
2.46 |
Strike price |
$ |
1.75 |
|
$ |
1.75 |
Expected volatility |
|
77.0% |
|
|
76.6% |
Risk-free interest rate |
|
1.6% |
|
|
1.7% |
Dividend yield |
|
- |
|
|
- |
Expected life in years |
|
4.9 |
|
|
5.0 |
The warrant liability, included in accrued expenses and other current liabilities in the accompanying consolidated balance sheets, is re-measured at the end of each reporting period with changes in fair value recognized in other income (expense) in the consolidated statements of comprehensive loss. Upon the exercise of a warrant that is classified as a liability, the fair value of the warrant exercised is re-measured on the exercise date and reclassified from warrant liability to additional paid-in capital.
12. Stock-Based Compensation
The Clean Diesel Technologies, Inc. Stock Incentive Plan (formerly known as the Clean Diesel Technologies, Inc. 1994 Incentive Plan), as amended (the Plan), provides for the awarding of incentive stock options, non-qualified stock options, stock appreciation rights, restricted shares, performance awards, bonuses or other forms of share-based awards, or combinations of these to the Companys directors, officers, employees, consultants and advisors (except consultants or advisors in capital-raising transactions) as determined by the board of directors. At the Companys Annual Meeting of Shareholders held on May 23, 2012, the Companys shareholders approved certain amendments to the Plan, the most significant of which changed the Plan name, removed the evergreen provision and established a maximum number of 1.4 million shares to be reserved for issuance under the Plan, disallowed the repricing of outstanding stock options without shareholder approval, removed the ability to issue cash bonus awards under the Plan and modified the change in control provisions within the Plan. As of December 31, 2014, there were 149,708 shares available for future grants under the Plan.
Total stock-based compensation expense was $0.6 million and $0.7 million for the years ended December 31, 2014 and 2013, respectively.
Stock Options
Stock option activity is summarized as follows:
|
|
|
Weighted Average Exercise Price |
|
Weighted Average Remaining Contractual Term (in years) |
|
Aggregate Intrinsic Value (thousands) |
||
|
Options |
|
|
|
|||||
Outstanding at December 31, 2013 |
714,712 |
|
$ |
7.17 |
|
|
|
|
|
Exercised |
(178,871) |
|
$ |
2.94 |
|
|
|
|
|
Cancelled |
(87,918) |
|
$ |
2.85 |
|
|
|
|
|
Outstanding at December 31, 2014 |
447,923 |
|
$ |
8.74 |
|
6.1 |
|
$ |
- |
Exercisable at December 31, 2014 |
396,291 |
|
$ |
9.50 |
|
6.0 |
|
$ |
- |
The aggregate intrinsic value represents the difference between the exercise price and the Companys closing stock price on the last trading day of the year.
Stock options granted under the Plan typically expire ten years from the date of grant and are issued at a price equal to the fair market value of the underlying stock on the date of grant. The Companys board of directors may establish such vesting and other conditions with respect to options as it deems appropriate.
F-24
Compensation costs for stock options that vest over time are recognized over the vesting period on a straight-line basis. As of December 31 2014, the remaining unrecognized compensation cost related to stock option grants was insignificant.
Restricted Stock Units
RSU activity is as follows:
As of December 31, 2014, the Company had approximately $0.8 million of unrecognized compensation expense related to RSUs, which will be recognized over a weighted average estimated remaining life of 1.9 years. The RSUs vested and unissued noted in the table above represent awards granted to employees who are subject to the terms of the Companys black out policy from time to time due to their knowledge of non-public information and who were unable to sell shares on the open market to cover their tax obligations for their vested RSUs by the dates noted above.
13. Other Expense, Net
Other expense, net, consists of the following (in thousands):
|
Years Ended
December 31, |
||||
|
|||||
|
2014 |
|
2013 |
||
Loss on change in fair value of liability-classified warrants |
$ |
(506) |
|
$ |
(180) |
Offering costs allocated to warrants issued |
|
(293) |
|
|
(123) |
Income (loss) from unconsolidated affiliates |
|
46 |
|
|
(561) |
Foreign currency exchange gain |
|
549 |
|
|
56 |
Other |
|
30 |
|
|
52 |
Other expense, net |
$ |
(174) |
|
$ |
(756) |
14. Income Taxes
Income (loss) from continuing operations before income taxes include the following components (in thousands):
|
Years Ended
December 31, |
||||
|
|||||
|
2014 |
|
2013 |
||
U.S.-based operations |
$ |
(9,979) |
|
$ |
(8,556) |
Non U.S.-based operations |
|
1,004 |
|
|
2,053 |
|
$ |
(8.975) |
|
$ |
(6.503) |
F-25
CLEAN DIESEL TECHNOLOGIES, INC.
Notes to Consolidated Financial Statements
Income tax expense (benefit) attributable to loss from continuing operations is summarized as follows (in thousands):
|
Current |
|
Deferred |
|
Total |
|||
Year ended December 31, 2014: |
|
|
|
|
|
|
|
|
U.S. Federal |
$ |
4 |
|
$ |
- |
|
$ |
4 |
State and local |
|
17 |
|
|
- |
|
|
17 |
Foreign |
|
444 |
|
|
(327) |
|
|
117 |
Total |
$ |
465 |
|
$ |
(327) |
|
$ |
138 |
|
Current |
|
Deferred |
|
Total |
|||
Year ended December 31, 2013: |
|
|
|
|
|
|
|
|
U.S. Federal |
$ |
- |
|
$ |
- |
|
$ |
- |
State and local |
|
4 |
|
|
- |
|
|
4 |
Foreign |
|
405 |
|
|
(69) |
|
|
336 |
Total |
$ |
409 |
|
$ |
(69) |
|
$ |
340 |
Income taxes attributable to loss from continuing operations differ from the amounts computed by applying the U.S. federal statutory rate of 34% to loss from continuing operations before income taxes as shown below (in thousands):
Years Ended
December 31,
2014
2013
$
$
$
$
Expected tax benefit
(3,052)
(2,211)
Net tax effects of:
Foreign tax rate differential
(214)
(515)
State taxes, net of federal benefit
(381)
(48)
Return to provision adjustment
(579)
(270)
Research and other credits
(92)
(139)
Permanent difference on Convertible Notes and warrants
277
61
Expiring net operating loss carryforwards
2,441
-
Permanent difference on deemed dividend
-
1,040
Other
175
35
Change in deferred tax asset valuation allowance
1,563
2,387
138
340
F-26
Deferred tax assets and liabilities consist of the following (in thousands):
|
December 31, |
||||
|
2014 |
|
2013 |
||
Deferred tax assets: |
|
|
|
|
|
Research and development credits |
$ |
2,054 |
|
$ |
1,824 |
Other credits |
|
378 |
|
|
378 |
Operating loss carry forwards |
|
13,974 |
|
|
12,592 |
Inventories |
|
282 |
|
|
338 |
Allowance for doubtful accounts |
|
321 |
|
|
118 |
Depreciation |
|
400 |
|
|
349 |
Deferred research and development expenses for income tax |
|
327 |
|
|
327 |
Non-cash compensation |
|
1,176 |
|
|
957 |
Other |
|
410 |
|
|
794 |
Total gross deferred tax assets |
|
19,322 |
|
|
17,677 |
Valuation allowance |
|
(18,856 ) |
|
|
(17,293) |
Net deferred tax assets |
$ |
466 |
|
$ |
384 |
|
|
|
|
|
|
Deferred tax liabilities |
|
|
|
|
|
Other identifiable intangible assets |
$ |
(825) |
|
$ |
(1,070 ) |
Total gross deferred tax liabilities |
|
(825 ) |
|
|
(1,070 ) |
Net deferred tax liabilities |
$ |
(359 ) |
|
$ |
(686) |
The Company had approximately $34.4 million, $20.4 million and $4.6 million of federal, state and foreign income tax net operating loss carryforwards at December 31, 2014, respectively. The foreign net operating losses can be carried forward indefinitely. Future utilization of the federal and state net operating losses and credit carryforwards is subject to a substantial annual limitation due to ownership change limitations as required by Sections 382 and 383 of the Internal Revenue Code of 1986, as amended (the Code), as well as similar state limitations.
The Company performed a study to evaluate the status of net operating loss carryforwards as a result of the ownership change from the Merger. The results of the study provided that the merger caused an ownership change of the Company as defined for U.S. federal income tax purposes as of the date of the merger. The ownership change will significantly limit the use of the Companys net operating losses and credits in future tax years. Of the $34.4 million federal loss carryforwards approximately $5.4 million of the loss will be subject to an annual limitation of $0.4 million within the next 5 years and $0.2 million for the following 15 years. The federal net operating loss carryforwards will expire in fiscal year 2034. As a result of the ownership change the federal research and development credits have been limited and based on the limitation the Company does not anticipate being able to use any of these credits that existed as of the date of the Merger in future tax years. However, the Company has approximately $0.3 million in research and development credits post-Merger which is not subject to any limitation. Of the $20.4 million of state net operating loss carryforwards approximately $1.1 million of the loss will be subject to an annual limitation of $0.1 for the next 20 years. The state net operating loss carryforwards will expire in fiscal year 2034 . The Company has state research and development credits of $2.7 million. Since the state credits have an indefinite life, the Company did not write them off even though it is also limited under Section 383. The Company has a full valuation allowance against the related deferred tax assets as it is more likely than not that they will not be realized by the Company.
In assessing the potential realization of deferred tax assets, consideration is given to whether it is more likely than not that some portion or all of the deferred tax assets will be realized. The ultimate realization of deferred tax assets is dependent upon the Company attaining future taxable income during the periods in which those temporary differences become deductible. In addition, the utilization of net operating loss carryforwards may be limited due to restrictions imposed under applicable federal and state tax laws due to a change in ownership. Based upon the level of historical operating losses and future projections, management believes it is more likely than not that the Company will not realize the deferred tax assets.
The Company has not recognized a deferred tax liability on undistributed earnings of its foreign subsidiaries, because these earnings are intended to be permanently reinvested. The amount of the unrecognized deferred tax liability depends on judgment required to analyze the withholding tax due, the applicable tax law and factual circumstances in effect at the time of any such distributions. Therefore, the Company believes it is not practicable at this time to reliably determine the amount of unrecognized deferred tax liability related to its undistributed earnings; however, these undistributed earnings are immaterial. If circumstances change and it becomes apparent that some or all of the undistributed earnings of a subsidiary will be remitted and income taxes have not been recognized by the parent entity, the parent entity shall accrue as an expense of the current period income taxes attributable to that remittance.
F-27
The following changes occurred in the amount of unrecognized tax benefits including related interest and penalties (in thousands):
|
Years Ended
December 31, |
||||
|
|||||
|
2014 |
|
2013 |
||
Balance at beginning of year |
$ |
543 |
|
$ |
452 |
Additions for current year tax provisions |
|
140 |
|
|
91 |
Reduction for prior year tax provisions |
|
- |
|
|
- |
Balance at end of year |
$ |
683 |
|
$ |
543 |
If recognized, the entire amount of the unrecognized tax benefits would affect the effective tax rate. As of December 31, 2014 and 2013, the Company had $0.2 million accrued for payment of interest and penalties related to unrecognized tax benefits.
The Company operates in multiple tax jurisdictions, both within and outside of the United States. Although the timing of the resolution and/or closure of audits is not certain, the Company does not believe it is reasonably possible that its unrecognized tax benefits would materially change in the next twelve months. The following tax years remain open to examination by the major domestic taxing jurisdictions to which it is subject:
|
Open Tax Years |
United States Federal |
2011 2014 |
United States State |
2010 2014 |
Canada |
2009 2014 |
Sweden |
2012 2014 |
United Kingdom |
2010 2014 |
15. Equity Investments
Pirelli Joint Venture
On February 19, 2013, the Company entered into a joint venture agreement (the Joint Venture Agreement) with Pirelli & C. Ambiente SpA (Pirelli) to form a joint venture entity, Eco Emission Enterprise Srl under the laws of Italy (the Joint Venture), through which the Company and Pirelli would jointly sell their emission control products in Europe and the Commonwealth of Independent States countries. Pursuant to the agreement, both partners agreed to sell products to the Joint Venture which would earn a commission to market and sell these products. As such, all of the Companys existing business in Sweden and the U.K. would be conducted through the Joint Venture. The Joint Venture commenced operations in April 2013.
The Joint Venture Agreement provided that the Company and Pirelli each held 50% of the total issued share capital of the Joint Venture. Pursuant to the Joint Venture Agreement, in February 2013, the Company and Pirelli each contributed 50,000 (approximately $66,000) to the Joint Venture as initial capital contributions. In addition, in accordance with the Joint Venture Agreement, the Company and Pirelli provided shareholder loans of 200,000 (approximately $261,000) each in April 2013. During 2013, these loans were converted into equity contributions as required by local statutory regulations. In the fourth quarter of 2013, the Company and Pirelli each contributed an additional 262,000 (approximately $361,000) to the Joint Venture.
The Company accounts for its investment in the Joint Venture using the equity method. During the year ended December 31, 2013, the Joint Venture incurred a loss of 0.9 million (approximately $1.2 million), and accordingly, the Company recorded a loss of $0.6 million in other expense.
F-28
On November 8, 2013, as a result of slower than anticipated progress in achieving sales objectives initially established for the Joint Venture, the Company and Pirelli agreed to voluntarily dissolve the Joint Venture in accordance with the Joint Venture Agreement. The Joint Venture ceased operations on November 30, 2013 and commenced liquidation on December 9, 2013. The dissolution was finalized in April 2014. The majority of the Companys investment balance of $0.1 million, included in other assets in the accompanying consolidated balance sheet December 31, 2013, was received in April 2014, with a small balance to be collected following the receipt of value added tax due from the Swedish and Italian governments. The Company has resumed its operations in Europe in a similar manner as conducted prior to the Joint Venture.
TCC Investment
In February 2008, the Company entered into an agreement with Tanaka Holdings Co., Ltd. (formerly Tanaka Holdings K.K.), a Japanese company, which, together with its subsidiary Tanaka Kikinzoku Kogyo K.K., is referred to herein as TKK, to form a new joint venture company, TC Catalyst, Inc. (TCC), a Japanese corporation. The joint venture is part of the Catalyst division. The Company entered the joint venture in order to improve its presence in Japan and Asia and strengthen its business flow into the Asian market. Initially, the Company and TKK each owned 50% of TCC.
In December 2008, the Company sold shares in TCC to TKK reducing its ownership to 30% and also sold to TKK certain intellectual property and associated rights in various countries in Asia (the Territory) related to heavy duty catalysts used in commercial vehicles and applications. In December 2009, the Company sold to TKK certain intellectual property and associated rights in the Territory related to three-way catalysts, including low-platinum group metal (PGM) catalysts, for non-commercial light vehicles and zero-PGM three-way catalysts for heavy duty commercial vehicles and applications and non-commercial light vehicles . As part of the transaction, the Company also sold shares in TCC, which reduced its ownership in the joint venture to 5%. The Company remains contractually obligated to fund its portion of the losses of the joint venture based on its ownership percentage, and it has also agreed not to compete in the Territory with TKK or TCC in connection with heavy duty commercial vehicles and applications and light duty vehicles.
Subsequent to these arrangements, the Company discovered that an exception allowing it to continue to supply catalysts in Japan to its largest customer had been omitted in an amendment to the original transaction documents with TKK. The Company has shipped approximately $ 5.6 million of catalysts covered by the agreements since such amendment through December 31, 2014. In this regard, the Company has made a good faith payment of $0.3 million to TKK with respect to such prior shipments. For additional information regarding recent developments with TKK and TCC, refer to Note 19, Subsequent Event .
The Companys investment in TCC is accounted for using the equity method as the Company still has significant influence over TCC as a result of having a seat on TCCs board and due to the technological interdependence between TCC and the Company. The Companys share of income and losses of TCC for the periods presented in this report are not significant.
16. Commitments and Contingencies
Lease Commitments
The Company leases certain equipment and facilities under operating leases that expire through 2020. The Company recognizes its minimum lease payments, including escalation clauses, on a straight-line basis over the minimum lease term of the lease. Rent expense was $1.0 million during the years ended December 31, 2014 and 2013.
Future minimum lease payments under non-cancelable operating leases (with initial or remaining lease terms in excess of one year) as of December 31, 2014 are (in thousands):
Years ending December 31: |
|
|
2015 |
$ |
640 |
2016 |
|
571 |
2017 |
|
408 |
2018 |
|
353 |
2019 and thereafter |
|
3 |
Total minimum lease payments |
$ |
1,975 |
F-29
Catalyst division The Catalyst division develops and produces catalysts to reduce emissions from gasoline, diesel and natural gas combustion engines that are offered for multiple markets and a wide range of applications. The Catalyst Division developed a family of unique high-performance catalysts, featuring inexpensive base-metals with low or even no platinum group metals, or PGMs, to provide increased catalytic function and value for technology-driven automotive industry customers. The Catalyst divisions technical and manufacturing competence in the light duty vehicle market is aimed at meeting auto makers most stringent requirements, and it has supplied over eleven million parts to light duty vehicle customers since 2001. The Catalyst division also provides catalyst formulations for the Companys Heavy Duty Diesel Systems division. Intersegment revenues are based on market prices.
Corporate Corporate includes cost for personnel, insurance and public company expenses such as legal, audit and taxes that are not allocated down to the operating divisions.
Summarized financial information for the Companys reportable segments is as follows (in thousands):
F- 3 1
|
December 31, |
||||
|
2014 |
|
2013 |
||
Total assets |
|
|
|
|
|
Heavy Duty Diesel Systems |
$ |
41,234 |
|
$ |
40,691 |
Catalyst |
|
43,333 |
|
|
41,687 |
Assets of discontinued operations held for sale |
|
- |
|
|
1,490 |
Eliminations |
|
(56,228) |
|
|
(55,499) |
Total |
$ |
28,339 |
|
$ |
28,369 |
Net sales by geographic region based on location of sales organization is as follows (in thousands):
|
Years Ended
December 31, |
||||
|
|||||
|
2014 |
|
2013 |
||
United States |
$ |
22,678 |
|
$ |
23,176 |
Canada |
|
14,300 |
|
|
23,913 |
Europe |
|
4,253 |
|
|
4,712 |
Total international |
|
18,553 |
|
|
28,625 |
Total revenues |
$ |
41,231 |
|
$ |
51,801 |
Net fixed assets and total assets by geographic region as of December 31, 2014 and 2013 is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed Assets |
|
Total Assets |
||||||||
|
2014 |
|
2013 |
|
2014 |
|
2013 |
||||
United States |
$ |
723 |
|
$ |
522 |
|
$ |
14,618 |
|
$ |
12,371 |
Canada |
|
632 |
|
|
803 |
|
|
11,076 |
|
|
12,874 |
Europe |
|
2 |
|
|
47 |
|
|
2,645 |
|
|
3,124 |
Total international |
|
634 |
|
|
850 |
|
|
13,721 |
|
|
15,998 |
Total revenues |
$ |
1,357 |
|
$ |
1,372 |
|
$ |
28,339 |
|
$ |
28,369 |
18. Discontinued Operations
The Reno Business
The Reno Business that the Company committed to sell in July 2014 is presented below as discontinued operations. Historically, the Reno Business was a component of the Companys Heavy Duty Diesel Systems division. On October 20, 2014, the Company completed the sale of its Reno Business for $1.3 million in cash. The net assets held for sale of the Reno Business were eliminated from the Companys balance sheet as of the sale date, and the Company recognized a gain of $0.2 million.
The following table presents the major classes of the assets and liabilities of discontinued operations held for sale in the consolidated balance sheet as of December 31, 2013.
F-32
|
December 31, 2013 |
|
|
||
Assets: |
|
|
Accounts receivable, net |
$ |
379 |
Inventories |
|
634 |
Prepaid expenses and other current assets |
|
34 |
Total current assets of discontinued operations held for sale |
$ |
1,047 |
|
|
|
Property and equipment, net |
|
87 |
Intangible assets, net |
|
70 |
Goodwill |
|
286 |
Total long-term assets of discontinued operations held for sale |
$ |
443 |
|
|
|
Total assets of discontinued operations held for sale |
$ |
1,490 |
|
|
|
Liabilities: |
|
|
Accounts payable |
$ |
283 |
Accrued expenses and other current liabilities |
|
143 |
Total liabilities of discontinued operations held for sale |
$ |
426 |
|
|
|
Net assets of discontinued operations held for sale |
$ |
1,064 |
On November 15, 2013, BP Products North America (BP) instituted claims against JM as the parent company of and purchaser of AUS, a former subsidiary of the Company. On May 12, 2010, JM tendered to the Company a claim for indemnification under the Asset Purchase Agreement, dated October 1, 2009, (the Asset Purchase Agreement) among JM, the Company and AUS. On June 11, 2013, BP, JM and the Company entered into a settlement agreement and mutual release pursuant to which they settled all claims. The settlement agreement had no material impact on the Company. Under the indemnification clauses of the Asset Purchase Agreement, the Company may be liable for legal expenses incurred by JM. These legal costs may be offset against funds withheld by JM from the acquisition of AUS.
In connection with the Asset Purchase Agreement, JM presented the Company with an indemnification claim seeking recovery of the net amount of $0.9 million after offsetting the funds withheld by JM from the acquisition of AUS. These claims are for matters relating to various customer contracts that JM purchased, including the BP contract discussed above. The Company and JM have entered into discussions relating to the application of offsets and the validity of the claims presented. The Company initially offered a settlement amount of $0.2 million and had accrued for this estimated liability during 2013. Recently, the Company offered a settlement amount of $0.7 million, and as a result, an additional accrual for the increase in this estimated liability was recorded in discontinued operations during 2014. Since the discussions are ongoing, the ultimate costs associated with this matter cannot be determined at this time.
In presenting discontinued operations for the Reno Business and AUS , general corporate overhead expenses that have been allocated historically to the Reno Business for segment presentation purposes are not included in discontinued operations. The following table presents revenue and expense information for discontinued operations for the years ended December 31, 2014 and 2013.
19. Subsequent Event
Expanding Commercialization Opportunities in the Asia Territory
On March 13, 2015, the Company further amended its agreements with TKK and TCC to, among other things, enable it to sell in the Territory (i) coated substrates or certain catalytic materials utilizing the technology that the Company sold to TKK for a 4% royalty to TKK; (ii) coated substrates and certain catalytic materials utilizing solely new technology developed by the Company after it sold TKK the prior technology, as well as licenses of such technology related to catalysts for heavy-duty commercial vehicles and applications and light duty vehicles, for a 3% royalty to TKK; (iii) products used in vehicles without a royalty, provided that the ultimate user of the vehicle which contains the product purchases the vehicle outside the Territory; (iv) limited quantities of coated substrates or certain catalytic materials sold for the purpose of customer testing, evaluation and approval without a royalty; (v) limited quantities of coated substrates sold during an extended period of time after mass production ends for a specified vehicle model year program without a royalty.
Pursuant to the terms of the amendment, once an aggregate amount of approximately $16.6 million in royalties has been paid by the Company to TKK, it may commercialize any technology without a royalty, including inside the Territory.
F-34
EXHIBIT INDEX
F-35
EXHIBIT 3.1
Restated Certificate of Incorporation
of
Clean Diesel Technologies, Inc.
As Amended Through May 23, 2012
1. The name of the corporation is Clean Diesel Technologies, Inc., hereinafter referred to as the corporation.
2. The address of its registered office in the State of Delaware is Corporation Trust Center, 1209 Orange Street, in the city of Wilmington, County of New Castle. The name of its registered agent at such address is The Corporation Trust Company.
3. The nature of the business or purpose to be conducted or promoted is to engage in any lawful act or activity for which corporations may be organized under the General Corporation law of Delaware.
4. The Corporation shall have authority to issue the total number of Twenty Four Million One Hundred Thousand (24,100,000) Shares of the par value of $0.01 per share, amounting in the aggregate to Two Hundred Forty One Thousand Dollars ($241,000), and of such shares, Twenty Four Million (24,000,000) shall be designated as Common Stock and One Hundred Thousand (100,000) shall be designated as preferred stock.
The preferred stock may be issued from time to time in one or more series. The Board of Directors is hereby authorized, within the limitations and restrictions set forth in this Certificate, to issue the preferred stock in one or more series and, in connection with the creation of any such series, by resolution or resolutions providing for the issue of the shares thereof, to determine and fix such voting powers, full or limited, or no voting powers, and such designations, preferences and relative, participating, optional or other special rights and qualifications, limitations or restrictions thereof, including without limitation, dividend rights, dividend rates, conversion rights, rights and terms of redemption (including sinking fund provisions), and the liquidation preferences of any unissued series of preferred stock and the number of shares constituting any such series; and to increase or decrease the number of shares of any series subsequent to the issue of shares of that series, but not above the total number of authorized shares of the class and not below the number of shares of such series then outstanding. In case the number of shares of any series shall be so decreased, the shares constituting such decrease shall resume the status which they had prior to the adoption of the resolution originally fixing the number of shares of such series. In no event, however, may the Board of Directors issue preferred stock which has the effect of voting as a class during the pendency of a tender offer to purchase more than 50% of the common stock of the Company, unless the tender offeror(s) consent to such issuance.
5. In furtherance and not in limitation of the powers conferred by statute, the Board of Directors is expressly authorized to make, alter or repeal the by-laws of the corporation.
1
6. Elections of Directors need not be by written ballot unless the by-laws of the corporation shall so provide.
7. Meetings of stockholders may be held within or without the state of Delaware, as the by-laws may provide. The books of the corporation may be kept outside of the State of Delaware at such place or places as may be designed from time to time by the board of directors or in the by-laws of the corporation.
8. (a) A director of the corporation shall not be personally liable to the corporation or its stockholders for monetary damages for breach of fiduciary duty as a director except that this Article 9 shall not eliminate or limit a director's liability (i) for any breach of the director's duty of loyalty to the corporation or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) under Section 174 of the Delaware General Corporation law, or (iv) for any transaction from which the director derived an improper personal benefit.
(b) If the Delaware General Corporation Law is amended after approval by the stockholders of this Article 8 to authorize corporate action further eliminating or limiting the personal liability of directors, then the liability of a director of the corporation shall be eliminated or limited to the fullest extent permitted by the Delaware General Corporation Law, as so amended from time to time.
(c) Any repeal or modification of this Article 8 shall not increase the personal liability of any director of this corporation for any act or occurrence taking place prior to such repeal or modification, or otherwise adversely affecting any right or protection of a director of the corporation existing at the time of such repeal or modification.
9. (a) Except as otherwise provided below, the corporation, shall, to the fullest extent indemnify each person who is, or shall have been, a director, officer, employee or agent of the corporation or who is or was a director, officer, employee or agent of the corporation and is serving, or shall have served, at the request of the corporation, as a director, officer, employee or agent of another organization or in any capacity with respect to any employee benefit plan of the corporation, against all liabilities and expenses (including judgments, fines, penalties, amounts paid or to be paid in settlement, and reasonable attorneys fees) imposed upon or incurred by any such person (the "Indemnitee") in connection with, or arising out of, the defense of disposition of any action, suit or other proceeding, whether civil or criminal, in which he may be a defendant or with which he may be threatened or otherwise involved, directly or indirectly, by reason of his being or having been such a director, officer, employee or agent or as a result of his serving or having served with respect to any such employee benefit plan; provided, however, that the corporation shall provide no indemnification with respect to any matter as to which any such Indemnitee shall be finally adjudicated in such action suit or proceeding not to have acted in good faith in the reasonable belief that his action was (i) in the best interests of the corporation or (ii) to the extent such matter relates to service with respect to an employee benefit plan, in the best interests of the participants or beneficiaries of such employee benefit plan.
2
(b) The right to indemnification conferred in this Article 9 shall include the right to be paid by the corporation for liabilities and expenses incurred in connection with the settlement of compromise of any such action, suite or proceeding, pursuant to a consent decree or otherwise, unless a determination is made, within forty-five (45) days after receipt by the corporation of a written request by the Indemnitee for indemnification, that such settlement or compromise is not in the best interests of the corporation or, to the extent such matter related to service with respect to an employee benefit plan, that such settlement or compromise is not in the best interests of the participants or beneficiaries of such plan. Any such determination shall be made (i) by the board of directors of the corporation by a majority vote of a quorum consisting of disinterested directors, or (ii) if such quorum is not obtainable, by a majority of the disinterested directors then in office. Notwithstanding the foregoing, if there are less than two disinterested directors of the corporation then in office, the board of directors shall promptly direct that independent legal counsel (who may be regular legal counsel to the corporation) determine, based on facts know to such counsel at such time, whether such Indemnitee acted in good faith in the reasonable belief that this action was in the best interests of the corporation or the participants or beneficiaries of any such employee benefit plan, as the case may be; and, in such event, indemnification shall be made to such Indemnitee unless, within forty-five (45) days after receipt by the corporation of the request by such Indemnitee for indemnification, such independent legal counsel in a written opinion to the corporation determines that such Indemnitee did not act in good faith in the reasonable belief that his action was in the best interests of the corporation or the participants or beneficiaries of any such employee benefit plan, as the case may be.
(c) As a condition precedent to his right to be indemnified, the Indemnitee must give the corporation notice in writing as soon as practicable of any action, suit or proceeding involving him for which indemnity will or could be sought. With respect to any action, suit or proceeding of which the corporation is notified, the corporation will be entitled to participate therein at its own expense and/or to assume the defense thereof at its own expense, with legal counsel reasonably acceptable to such Indemnitee. After notice from the corporation to the Indemnitee of its election so to assume such defense, the corporation shall not be liable to such Indemnitee for any legal or other expenses subsequently incurred by such Indemnitee in connection with such claim, but the fees and expense of such counsel incurred after notice from the corporation of its assumption of the defense thereof shall be at the expense of the Indemnitee unless (i) the employment of counsel by the Indemnitee has been authorized by the corporation, (ii) counsel to the Indemnitee shall have reasonably concluded that there may be a conflict of interest or position on any significant issue between the corporation and the Indemnitee in the conduct of the defense of such action or (iii) the corporation shall not in fact have employed counsel to assume the defense of such action, in each of which cases, the fees and expenses of counsel for the Indemnitee shall be at the expense of the corporation, except as otherwise expressly provided by this Article. The corporation shall not be entitled to assume the defense of any claim brought by or on behalf of the corporation or as to which counsel for the Indemnitee shall have reasonably made the conclusion provided for in (ii) above.
3
(d) Subject to paragraph 4(c) above, the right to indemnification referred to in this Article shall include the right to be paid by the corporation for expenses (including reasonable attorneys' fees) incurred in defending a civil or criminal action, suit or proceeding in advance of its final disposition, subject to receipt of an undertaking by the Indemnitee to repay such payment if it is ultimately determined that the Indemnitee is not entitled to indemnification under this Article. Such undertaking may be accepted without reference to the financial ability of such Indemnitee to make such repayment. Notwithstanding the foregoing, no advance shall be made by the corporation under this paragraph (d) if a determination is reasonably and promptly made by the board of directors by a majority vote of a quorum consisting of disinterested directors or, if such quorum is not obtainable, by a majority of the disinterested directors of the corporation then in office or, if there are not at least two disinterested directors then in office, by independent legal counsel (who may be regular legal counsel to the corporation) in written opinion that, based on facts known to the board of directors or counsel at such time, such Indemnitee did not act in good faith in the reasonable belief that his action was in the best interests of the corporation or the participants or beneficiaries of an employee benefit plan of the corporation, as the case may be.
(e) If an Indemnitee is entitled under any provision of this Article to indemnification by the corporation of some or a portion of the liabilities or expenses imposed upon or incurred by such Indemnitee in the investigation, defense, appeal or settlement of any action, suite or proceeding but not, however, for the total amount thereof, the corporation shall nevertheless indemnify the Indemnitee for the portion of such liabilities or expenses to which such Indemnitee is entitled.
(f) The right to indemnification and the payment of expenses incurred in defending any action, suit or proceeding in advance of its final disposition conferred in this Article shall not be exclusive of any other right which any person may have or thereafter acquire under any statute, provision of the articles of incorporation, by-laws, agreement, vote of stockholders of managing directors or otherwise. Without limiting the generality of the foregoing, the corporation, acting through its board of directors, may enter into agreements with any director or employee of the corporation providing for indemnification rights equivalent to or greater than the indemnification rights set forth in this Article.
4
(g) The corporation may purchase and maintain insurance, at its expense, to protect itself and any director or employee of the corporation or another organization or employee benefit plan against any expense or liability incurred by him in any such capacity, or arising out of the status as such.
(h) The corporation's obligation to provide indemnification under this Article shall be offset to the extent of any other source of indemnification or any otherwise applicable insurance coverage under a policy maintained by the corporation or any other person.
(i) Without the consent of a person entitled to the indemnification and other rights provided in this Article, no amendment modifying or terminating such rights shall adversely affect such person's rights under this Article with respect to the period prior to such amendment.
(j) If this Article or any portion thereof shall be invalidated on any ground by any court of competent jurisdiction, then the corporation shall nevertheless indemnify each Indemnitee as to any liabilities and expenses with respect to any action, suit or proceedings to the full extent permitted by any applicable portion of this Article that shall not have been invalidated and to the full extent permitted by applicable law.
(k) As used in this Article, the term "director" "officer" "employee" "agent" and "person" include their respective heirs, executors, administrators and legal representatives and an "interested" director is one against whom in such capacity the proceedings in question or another proceeding on the same or similar grounds is then pending.
10. The corporation reserves the right to amend, alter, change or repeal any provision contained in this certificate of incorporation, in the manner now or hereafter prescribed by statute, and all rights conferred upon stockholders herein are granted subject to this reservation.
5
EXHIBIT 10.17
Kanis SA
Dear Dr. Kanis,
The following documents the agreed to changes in terms for the loans from Kanis SA to Clean Diesel Technologies, Inc.
Loan |
Principal |
Interest Rate |
Current Maturity Date |
Other Features |
Revised Terms |
1 |
$1,500,000 |
8% |
June 30, 2015 |
Payment Premium of $150,000 due at maturity |
Maturity Date and Payment Premium Revised to 10/1/2016. |
2 |
$3,000,000 |
8% |
April 11, 2016 |
Convertible into no more than 250,000 shares at $4.00 each. Callable by Lender at July 1, 2015. |
Maturity Date Revised to 10/1/2016. Loan is no longer callable by Lender. |
3 |
$3,000,000 |
8% |
July 27, 2015 |
None |
Maturity Date Revised to 10/1/2016. |
In consideration of the above changes to the loans from Kanis SA to CDTi, Kanis SA will be granted 80,000 warrants with a strike price of $1.75 and a term of 5 years.
Agreed upon this date: November 11, 2014
Kanis SA
Clean Diesel Technology, Inc.
by: /s/John A. Kanis
by: /s/ David E. Shea
its: Director
its: Chief Financial Officer
1621 Fiske Place, Oxnard, California 93033 ● Tel 1-805-486-4649 ● Fax 1-805-205-1333 ● www.cdti.com
EXHIBIT 10.18
THIS WARRANT HAS NOT BEEN AND WILL NOT REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE SECURITIES LAWS. THE HOLDER HEREOF, BY PURCHASING THIS WARRANT, AGREES FOR THE BENEFIT OF THE COMPANY THAT THIS WARRANT MAY NOT BE OFFERED, SOLD, PLEDGED, OR OTHERWISE TRANSFERRED BY SUCH HOLDER PRIOR TO THE LATER OF THE (X) SIX MONTHS FOLLOWING THE ISSUANCE HEREOF OR (Y) IF APPLICABLE, THREE MONTHS AFTER IT CEASES TO BE AN AFFILIATE, OTHER THAN (1) TO THE COMPANY, (2) PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE U.S. SECURITIES ACT OF 1933, AS AMENDED (THE SECURITIES ACT ), AND IN ACCORDANCE WITH ANY APPLICABLE LAWS OF ANY STATE OF THE UNITED STATES, (3) IN AN OFFSHORE TRANSACTION COMPLYING WITH REGULATION S UNDER THE SECURITIES ACT, (4) PURSUANT TO AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT PROVIDED BY RULE 144, IF APPLICABLE, UNDER THE SECURITIES ACT OR (5) IN A TRANSACTION THAT DOES NOT REQUIRE REGISTRATION UNDER THE SECURITIES ACT BUT IS IN ACCORDANCE WITH APPLICABLE STATE SECURITIES LAWS AND IN RELATION TO WHICH THE HOLDER HAS FURNISHED TO THE COMPANY AN OPINION TO SUCH EFFECT FROM COUNSEL OF RECOGNISED STANDING IN FORM AND SUBSTANCE SATISFACTORY TO THE COMPANY PRIOR TO SUCH OFFER, SALE, PLEDGE OR TRANSFER. THE HOLDER HEREOF, BY ACCEPTANCE OF THIS WARRANT, REPRESENTS AND AGREES FOR THE BENEFIT OF THE COMPANY THAT IT IS A NON-U.S. PERSON, AND ACKNOWLEDGES THAT HEDGING TRANSACTIONS INVOLVING THIS WARRANT MAY NOT BE CONDUCTED UNLESS CONDUCTED IN COMPLIANCE WITH THE SECURITIES ACT. THIS WARRANT IS NOT IMMEDIATELY EXERCISABLE IN FULL.
COMMON STOCK PURCHASE WARRANT
CLEAN DIESEL TECHNOLOGIES, INC.
Warrant Shares: 80,000 |
Issue Date: November 11, 2014 |
No. 31 |
THIS COMMON STOCK PURCHASE WARRANT (the Warrant ) certifies that, for value received, Kanis S.A. (the Holder ) is entitled, upon the terms and subject to the limitations on exercise and the conditions hereinafter set forth, at any time on or after the Issue Date and on or prior to the close of business on the five-year anniversary of the Issue Date (the Termination Date ) but not thereafter, to subscribe for and purchase from Clean Diesel Technologies Inc., a Delaware corporation (the Company ), up to 80,000 shares (the Warrant Shares ) of common stock, par value $0.01 per share ( Common Stock ). The purchase price of one share of Common Stock under this Warrant shall be equal to the Exercise Price, as defined in Section 2(b).
1
Section 1. Definitions . Capitalized terms used herein shall have the meanings given to them herein. As used herein, Business Day means any day on which the New York Stock Exchange, Inc. is open for trading
Section 2. Exercise .
a) Exercise of Warrant . Exercise of the purchase rights represented by this Warrant may be made, in whole or in part, from time to time on or before the Termination Date, subject to the terms and conditions herein, by delivery to the Company (or such other office or agency of the Company as it may designate by notice in writing to the registered Holder at the address of the Holder appearing on the books of the Company) of a duly executed facsimile copy of the Notice of Exercise Form annexed hereto with payment to the company of the exercise price of the Warrant Shares stated in the notice to be purchased. The Holder and any assignee, by acceptance of this Warrant, acknowledge and agree that, by reason of the provisions of this paragraph, following the purchase of a portion of the Warrant Shares hereunder, the number of Warrant Shares available for purchase hereunder at any given time may be less than the amount stated on the face hereof.
b) Exercise Price . The exercise price per share of the Common Stock under this Warrant shall be $1.75, subject to adjustment hereunder (the Exercise Price ).
c) Mechanics of Exercise .
i. Delivery of Certificates Upon Exercise . Certificates for shares purchased hereunder shall be transmitted by the transfer agent for the Common Stock (the Transfer Agent ) to the Holder by physical delivery to the address specified by the Holder in the Notice of Exercise or, if available, by crediting the account of the Holder s prime broker with the Depository Trust Company through its Deposit Withdrawal Agent Commission ( DWAC ) system.
ii. Delivery of New Warrants Upon Exercise . If this Warrant shall have been exercised in part, the Company shall, at the request of the Holder and upon surrender of this Warrant certificate, at the time of delivery of the certificate or certificates representing Warrant Shares, deliver to Holder a new Warrant evidencing the rights of Holder to purchase the unpurchased Warrant Shares called for by this Warrant, which new Warrant shall in all other respects be identical with this Warrant.
iii. No Fractional Shares or Scrip . No fractional shares or scrip representing fractional shares shall be issued upon the exercise of this Warrant. As to any fraction of a share which the Holder would otherwise be entitled to purchase upon such exercise, the Company shall, at its election, either pay a cash adjustment in respect of such final fraction in an amount equal to such fraction multiplied by the Exercise Price or round up to the next whole share.
iv. Charges, Taxes and Expenses . Issuance of certificates for Warrant Shares shall be made without charge to the Holder for any issue or transfer tax or
2
other incidental expense in respect of the issuance of such certificate, all of which taxes and expenses shall be paid by the Company, and such certificates shall be issued in the name of the Holder or in such name or names as may be directed by the Holder; provided , however , that in the event certificates for Warrant Shares are to be issued in a name other than the name of the Holder, this Warrant when surrendered for exercise shall be accompanied by the Assignment Form attached hereto duly executed by the Holder and the Company may require, as a condition thereto, the payment of a sum sufficient to reimburse it for any transfer tax incidental thereto.
v. Closing of Books . The Company will not close its stockholder books or records in any manner which prevents the timely exercise of this Warrant, pursuant to the terms hereof.
Section 3. Certain Adjustments .
a) Stock Dividends and Splits . If the Company, at any time while this Warrant is outstanding: (i) pays a stock dividend or otherwise makes a distribution or distributions on shares of its Common Stock or any other equity or equity equivalent securities payable in shares of Common Stock (which, for avoidance of doubt, shall not include any shares of Common Stock issued by the Company upon exercise of this Warrant), (ii) subdivides outstanding shares of Common Stock into a larger number of shares, (iii) combines (including by way of reverse stock split) outstanding shares of Common Stock into a smaller number of shares, or (iv) issues by reclassification of shares of the Common Stock any shares of capital stock of the Company, then in each case the Exercise Price shall be multiplied by a fraction of which the numerator shall be the number of shares of Common Stock (excluding treasury shares, if any) outstanding immediately before such event and of which the denominator shall be the number of shares of Common Stock outstanding immediately after such event. Any adjustment made pursuant to this Section 3(a) shall become effective immediately after the record date for the determination of stockholders entitled to receive such dividend or distribution and shall become effective immediately after the effective date in the case of a subdivision, combination or re-classification.
b) Pro Rata Distributions . If the Company, at any time while this Warrant is outstanding, shall distribute to all holders of Common Stock (and not to the Holder) evidences of its indebtedness or assets (including cash and cash dividends) or rights or warrants to subscribe for or purchase any security other than the Common Stock (which shall be subject to Section 3(b)), then in each such case the Exercise Price shall be adjusted by multiplying the Exercise Price in effect immediately prior to the record date fixed for determination of stockholders entitled to receive such distribution by a fraction of which the denominator shall be the VWAP (as defined below) determined as of the record date mentioned above, and of which the numerator shall be such VWAP (as defined below) on such record date less the then per share fair market value at such record date of the portion of such assets or evidence of indebtedness so distributed applicable to one outstanding share of the Common Stock as determined by the Board of Directors in good faith. In either case the adjustments shall be described in a statement
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provided to the Holder of the portion of assets or evidences of indebtedness so distributed or such subscription rights applicable to one share of Common Stock. Such adjustment shall be made whenever any such distribution is made and shall become effective immediately after the record date mentioned above.
VWAP means, for any date, the price determined by the first of the following clauses that applies: (a) if the Common Stock is then listed or quoted on whichever of the New York Stock Exchange, NYSE Amex Equities, the NASDAQ Global Select Market, the NASDAQ Global Market or the NASDAQ Capital Market on which the Common Stock is listed or quoted for trading on the date in question (a Trading Market ), the daily volume weighted average price of the Common Stock for such date (or the nearest preceding date) on the Trading Market on which the Common Stock is then listed or quoted as reported by Bloomberg L.P. (based on a Trading Day from 9:30 a.m. (New York City time) to 4:02 p.m. (New York City time), (b) if the OTC Bulletin Board is not a Trading Market, the volume weighted average price of the Common Stock for such date (or the nearest preceding date) on the OTC Bulletin Board, (c) if the Common Stock is not then listed or quoted for trading on the OTC Bulletin Board and if prices for the Common Stock are then reported in the Pink Sheets published by Pink OTC Markets, Inc. (or a similar organization or agency succeeding to its functions of reporting prices), the most recent bid price per share of the Common Stock so reported, or (d) in all other cases, the fair market value of a share of Common Stock as determined by an independent appraiser selected in good faith by the Holders of a majority in interest of the Securities then outstanding and reasonably acceptable to the Company, the fees and expenses of which shall be paid by the Company.
c) Fundamental Transaction . If, at any time while this Warrant is outstanding, (i) the Company, directly or indirectly, in one or more related transactions effects any merger or consolidation of the Company with or into another Person in which the Company is not the surviving entity or the stockholders of the Company immediately prior to such merger or consolidation do not own, directly or indirectly, at least 50% of the outstanding voting securities of the surviving entity, (ii) the Company, directly or indirectly, effects any sale, lease, license, assignment, transfer, conveyance or other disposition of all or substantially all of its assets in one or a series of related transactions; provided, however, that a sale by the Company of any manufacturing business segment, product line or division shall not be deemed to be a sale of substantially all of the assets of the Company, (iii) any, direct or indirect, purchase offer, tender offer or exchange offer (whether by the Company or another Person) is completed pursuant to which all or substantially all of the holders of Common Stock are permitted to sell, tender or exchange their shares for other securities, cash or property and has been accepted by the holders of 50% or more of the outstanding Common Stock, or (iv) the Company, directly or indirectly, in one or more related transactions effects any reclassification, reorganization or recapitalization of the Common Stock or any compulsory share exchange pursuant to which the Common Stock is effectively converted into or exchanged for other securities, cash or property (other than as a result of a subdivision or combination of shares of Common Stock covered by Section 3(a) above), (each a Fundamental Transaction ),
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then, upon any subsequent exercise of this Warrant, the Holder shall have the right to receive, for each Warrant Share that would have been issuable upon such exercise immediately prior to the occurrence of such Fundamental Transaction, at the option of the Holder (without regard to any limitation in Section 2(e) on the exercise of this Warrant), the number of shares of Common Stock of the successor or acquiring corporation or of the Company, if it is the surviving corporation, and any additional consideration (the Alternate Consideration ) receivable as a result of such Fundamental Transaction by a holder of the number of shares of Common Stock for which this Warrant is exercisable immediately prior to such Fundamental Transaction (without regard to any limitation in Section 2(e) on the exercise of this Warrant). For purposes of any such exercise, the determination of the Exercise Price shall be appropriately adjusted to apply to such Alternate Consideration based on the amount of Alternate Consideration issuable in respect of one share of Common Stock in such Fundamental Transaction, and the Company shall apportion the Exercise Price among the Alternate Consideration in a reasonable manner reflecting the relative value of any different components of the Alternate Consideration. If holders of Common Stock are given any choice as to the securities, cash or property to be received in a Fundamental Transaction, then the Holder shall be given the same choice as to the Alternate Consideration it receives upon any exercise of this Warrant following such Fundamental Transaction. Notwithstanding anything to the contrary, in the event of a Fundamental Transaction other than one in which a Successor Entity (as defined below) that is a publicly traded corporation whose stock is quoted or listed for trading on an Eligible Market assumes this Warrant such that the Warrant shall be exercisable for the publicly traded Common Stock of such Successor Entity, the Company or any Successor Entity shall, at the Holder s option, exercisable at any time concurrently with, or within 30 days after, the consummation of the Fundamental Transaction, purchase this Warrant from the Holder by paying to the Holder an amount of cash equal to the Black Scholes Value of the remaining unexercised portion of this Warrant on the date of the consummation of such Fundamental Transaction. As used herein (w) Black Scholes Value means the value of this Warrant based on the Black and Scholes Option Pricing Model obtained from the OV function on Bloomberg, L.P. ( Bloomberg ) determined as of the day of consummation of the applicable Fundamental Transaction for pricing purposes and reflecting (A) a risk-free interest rate corresponding to the U.S. Treasury rate for a period equal to the time between the date of the public announcement of the applicable Fundamental Transaction and the Termination Date, (B) an expected volatility equal to the greater of 100% and the 100 day volatility obtained from the HVT function on Bloomberg as of the Trading Day immediately following the public announcement of the applicable Fundamental Transaction, (C) the underlying price per share used in such calculation shall be the sum of the price per share being offered in cash, if any, plus the value of any non-cash consideration, if any, being offered in such Fundamental Transaction and (D) a remaining option time equal to the time between the date of the public announcement of the applicable Fundamental Transaction and the Termination Date, (1) Successor Entity means the Person (as defined below) (or, if so elected by the Holder, the Parent Entity (as defined below)) formed by, resulting from or surviving any Fundamental Transaction or the Person (or, if so elected by the Holder, the Parent Entity) with which such Fundamental Transaction shall have been entered into, (2) Eligible Market means the
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NYSE Amex, The NASDAQ Capital Market, The NASDAQ Global Market, The NASDAQ Global Select Market, the New York Stock Exchange or the OTC Bulletin Board (or any successors to any of the foregoing), (3) Parent Entity of a Person means an entity that, directly or indirectly, controls the applicable Person and whose common stock or equivalent equity security is quoted or listed on an Eligible Market, or, if there is more than one such Person or Parent Entity, the Person or Parent Entity with the largest public market capitalization as of the date of consummation of the Fundamental Transaction. The terms of any agreement pursuant to which a Fundamental Transaction is effected shall include terms requiring any such successor or surviving entity to comply with the provisions of this Section 3(e) and insuring that this Warrant (or any such replacement security) will be similarly adjusted upon any subsequent transaction analogous to a Fundamental Transaction, and (4) Person means an individual, a limited liability company, a partnership, a joint venture, a corporation, a trust, an unincorporated organization, any other entity and a government or any department or agency thereof.
d) Intentionally Omitted.
e) Subsequent Equity Sales .
i. Except as provided in subsection (e)(iii) hereof, if and whenever the Company shall issue or sell, or is, in accordance with any of subsections (e)(ii)(l) through (e)(ii)(7) hereof, deemed to have issued or sold, any shares of Common Stock for a consideration per share (the New Issuance Price ) less than a price equal to the Exercise Price in effect immediately prior to such issue or sale or deemed issuance or sale (the foregoing a Trigger Issuance ), then, immediately after such Trigger Issuance, the Exercise Price then in effect shall be reduced to an amount equal to the New Issuance Price.
ii. For all purposes of the foregoing (including, without limitation, determining the adjusted Exercise Price and consideration per share under this Section 3(e)), the following subsections (e)(ii)(l) to (e)(ii)(7) shall also be applicable:
(1) Issuance of Rights or Options . In case at any time the Company shall in any manner grant (directly and not by assumption in a merger or otherwise) any warrants or other rights to subscribe for or to purchase, or any options for the purchase of, Common Stock or any stock or security convertible into or exchangeable for Common Stock (such warrants, rights or options being called Options and such convertible or exchangeable stock or securities being called Convertible Securities ), whether or not such Options or the right to convert or exchange any such Convertible Securities are immediately exercisable, and the price per share for which Common Stock is issuable upon the exercise of such Options or upon the conversion or exchange of such Convertible Securities (determined by dividing (i) the sum (which sum shall constitute the applicable consideration) of (x) the total amount, if any, received or receivable by the Company as consideration for the granting of such Options, plus (y) the aggregate amount of additional consideration payable to the Company upon the exercise of
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all such Options, plus (z), in the case of such Options which relate to Convertible Securities, the aggregate amount of additional consideration, if any, payable upon the issue or sale of such Convertible Securities and upon the conversion or exchange thereof, by (ii) the total maximum number of shares of Common Stock issuable upon the exercise of such Options or upon the conversion or exchange of all such Convertible Securities issuable upon the exercise of such Options) shall be less than the Exercise Price in effect immediately prior to the time of the granting of such Options, then the total number of shares of Common Stock issuable upon the exercise of such Options or upon conversion or exchange of the total amount of such Convertible Securities issuable upon the exercise of such Options shall be deemed to have been issued for such price per share as of the date of granting of such Options or the issuance of such Convertible Securities and thereafter shall be deemed to be outstanding for purposes of adjusting the Exercise Price. Except as otherwise provided in subsection 3(e)(ii)(3), no adjustment of the Exercise Price shall be made upon the actual issue of such Common Stock or of such Convertible Securities upon exercise of such Options or upon the actual issue of such Common Stock upon conversion or exchange of such Convertible Securities.
(2) Issuance of Convertible Securities . In case the Company shall in any manner issue (directly and not by assumption in a merger or otherwise) or sell any Convertible Securities, whether or not the rights to exchange or convert any such Convertible Securities are immediately exercisable, and the price per share for which Common Stock is issuable upon such conversion or exchange (determined by dividing (i) the sum (which sum shall constitute the applicable consideration) of (x) the total amount received or receivable by the Company as consideration for the issue or sale of such Convertible Securities, plus (y) the aggregate amount of additional consideration, if any, payable to the Company upon the conversion or exchange thereof, by (ii) the total number of shares of Common Stock issuable upon the conversion or exchange of all such Convertible Securities) shall be less than the Exercise Price in effect immediately prior to the time of such issue or sale, then the total maximum number of shares of Common Stock issuable upon conversion or exchange of all such Convertible Securities shall be deemed to have been issued for such price per share as of the date of the issue or sale of such Convertible Securities and thereafter shall be deemed to be outstanding for purposes of adjusting the Exercise Price, provided that (a) except as otherwise provided in subsection 3(e)(ii)(3), no adjustment of the Exercise Price shall be made upon the actual issuance of such Common Stock upon conversion or exchange of such Convertible Securities and (b) no further adjustment of the Exercise Price shall be made by reason of the issue or sale of Convertible Securities upon exercise of any Options to purchase any such Convertible Securities for which adjustments of the Exercise Price have been made pursuant to the other provisions of subsection 3(e).
(3) Change in Option Price or Conversion Rate . Upon the happening of any of the following events, namely, if the purchase price provided for in any Option referred to in subsection 3(e)(ii)(l) hereof, the additional consideration, if
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any, payable upon the conversion or exchange of any Convertible Securities referred to in subsections 3(e)(ii)(l) or 3(e)(ii)(2), or the rate at which Convertible Securities referred to in subsections 3(e)(ii)(l) or 3(e)(ii)(2) are convertible into or exchangeable for Common Stock shall change at any time (including, but not limited to, changes under or by reason of provisions designed to protect against dilution), the Exercise Price in effect at the time of such event shall forthwith be readjusted to the Exercise Price which would have been in effect at such time had such Options or Convertible Securities still outstanding provided for such changed purchase price, additional consideration or conversion rate, as the case may be, at the time initially granted, issued or sold. On the termination of any Option for which any adjustment was made pursuant to this subsection 3(e) or any right to convert or exchange Convertible Securities for which any adjustment was made pursuant to this subsection 3(e) (including, without limitation, upon the redemption or purchase for consideration of such Convertible Securities by the Company), the Exercise Price then in effect hereunder shall forthwith be changed to the Exercise Price which would have been in effect at the time of such termination had such Option or Convertible Securities, to the extent outstanding immediately prior to such termination, never been issued.
(4) Stock Dividends . Subject to the provisions of this Section 3(e), in case the Company shall declare a dividend or make any other distribution upon any stock of the Company (other than the Common Stock) payable in Common Stock, Options or Convertible Securities, then any Common Stock, Options or Convertible Securities, as the case may be, issuable in payment of such dividend or distribution shall be deemed to have been issued or sold without consideration.
(5) Calculation of Consideration Received . If any Option and/or Convertible Security and/or Adjustment Right ( as defined below) is issued in connection with the issuance or sale or deemed issuance or sale of any other securities of the Company (as determined by the holder, the Primary Security , and such Option and/or Convertible Security and/or Adjustment Right, the Secondary Securities ), together comprising one integrated transaction, the consideration per share of Common Stock with respect to such Primary Security shall be deemed to be equal to the difference of (x) the lowest price per share for which one share of Common Stock was issued in such integrated transaction (or was deemed to be issued pursuant to Section 3(e)(1) or 3(e)(2) above, as applicable) solely with respect to such Primary Security, minus (y) with respect to such Secondary Securities, the sum of (I) the Black Scholes Consideration Value of each such Option, if any, (II) the fair market value (as determined by the Holder) or the Black Scholes Consideration Value, as applicable, of such Adjustment Right, if any, and (III) the fair market value (as determined by the Holder) of such Convertible Security, if any, in each case, as determined on a per share basis in accordance with this Section 3(e)(5). Black Scholes Consideration Value means the value of the applicable Adjustment Rights (as the case may be) as of the date of issuance thereof calculated using the Black Scholes Option Pricing Model obtained from the OV function on Bloomberg utilizing (i) an underlying price per share equal to the closing sale price of the Common Stock on
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the Trading Day immediately preceding the public announcement of the execution of definitive documents with respect to the issuance of such Adjustment Rights (as the case may be), (ii) a risk-free interest rate corresponding to the U.S. Treasury rate for a period equal to the remaining term of such Adjustment Rights (as the case may be) as of the date of issuance of such Adjustment Rights (as the case may be), (iii) a zero cost of borrow and (iv) an expected volatility equal to the greater of 100% and the 100 day volatility obtained from the HVT function on Bloomberg (determined utilizing a 365 day annualization factor) as of the Trading Day immediately following the date of issuance of such Adjustment Rights (as the case may be). Adjustment Right means any right granted with respect to any securities issued in connection with, or with respect to, any issuance or sale or deemed issuance or sale of shares of Common Stock that could result in a decrease in the net consideration received by the Company in connection with, or with respect to, such securities (including, without limitation, any cash settlement rights, cash adjustment or other similar rights). If any shares of Common Stock, Options or Convertible Securities are issued or sold or deemed to have been issued or sold for cash, the consideration received therefor (for the purpose of determining the consideration paid for such Common Stock, Option or Convertible Security, but not for the purpose of the calculation of the Black Scholes Consideration Value) will be deemed to be the net amount of consideration received or receivable by the Company therefor. If any shares of Common Stock, Options or Convertible Securities are issued or sold for a consideration other than cash (for the purpose of determining the consideration paid for such Common Stock, Option or Convertible Security, but not for the purpose of the calculation of the Black Scholes Consideration Value), the amount of such consideration received or receivable by the Company will be the fair value of such consideration, except where such consideration consists of publicly traded securities, in which case the amount of consideration received by the Company for such securities will be the arithmetic average of the VWAPs of such security for each of the five (5) Trading Days immediately preceding the date of receipt. If any shares of Common Stock, Options or Convertible Securities are issued to the owners of the non-surviving entity in connection with any merger in which the Company is the surviving entity (for the purpose of determining the consideration paid for such Common Stock, Option or Convertible Security, but not for the purpose of the calculation of the Black Scholes Consideration Value), the amount of consideration therefor will be deemed to be the fair value of such portion of the net assets and business of the non-surviving entity as is attributable to such shares of Common Stock, Options or Convertible Securities, as the case may be. The fair value of any consideration other than cash or publicly traded securities will be determined jointly by the Company and the Holder. If such parties are unable to reach agreement within ten (10) days after the occurrence of an event requiring valuation (the Valuation Event ), the fair value of such consideration will be determined within five (5) Trading Days after the tenth (10th) day following such Valuation Event by an independent, reputable appraiser jointly selected by the Company and the Holder. The determination of such
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appraiser shall be final and binding upon all parties absent manifest error and the fees and expenses of such appraiser shall be borne by the Company.
(6) Record Date . In case the Company shall take a record of the holders of its Common Stock for the purpose of entitling them (i) to receive a dividend or other distribution payable in Common Stock, Options or Convertible Securities or (ii) to subscribe for or purchase Common Stock, Options or Convertible Securities, then such record date shall be deemed to be the date of the issue or sale of the shares of Common Stock deemed to have been issued or sold upon the declaration of such dividend or the making of such other distribution or the date of the granting of such right of subscription or purchase, as the case may be.
(7) Treasury Shares . The number of shares of Common Stock outstanding at any given time shall not include shares owned or held by or for the account of the Company or any of its wholly-owned subsidiaries, and the disposition of any such shares (other than the cancellation or retirement thereof) shall be considered an issue or sale of Common Stock for the purpose of this subsection (e).
iii. Exempt Issuance . Notwithstanding the foregoing, no adjustment will be made under this paragraph (e) in respect of an Exempt Issuance. For the purposes of this Warrant, Exempt Issuance means the issuance of (a) shares of Common Stock, Convertible Securities, restricted stock units, Options or common stock equivalents to employees, consultants officers or directors of the Company pursuant to any existing or future stock option, restricted stock, stock purchase or other equity compensation plan or pursuant to employee inducement awards duly adopted for such purpose, by a majority of the non-employee members of the Board of Directors or a majority of the members of a committee of non-employee directors established for such purpose, and the issuance of Common Stock in respect of such Convertible Securities,, restricted stock units, Options or common stock equivalents , (b) securities (including Common Stock and common stock equivalents) upon the exercise, conversion or exchange of securities (including Convertible Securities and Options) issued and outstanding on the date hereof, including the Warrants, provided that such securities have not been amended since date hereof to increase the number of such securities or to decrease the exercise price, exchange price or conversion price of such securities, (c) securities issued pursuant to acquisitions or strategic transactions approved by a majority of the disinterested directors of the Company, but shall not, for the purposes of this clause and (c), include a transaction in which the Company is issuing securities primarily for the purpose of raising capital or to an entity whose primary business is investing in securities and (d) the issuance of securities in a transaction described in Section 3(a) and (b) for which any adjustments shall be to the provisions of such sections.
f) Calculations . All calculations under this Section 3 shall be made to the nearest cent or the nearest 1/100th of a share, as the case may be. For purposes of this
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Section 3, the number of shares of Common Stock deemed to be issued and outstanding as of a given date shall be the sum of the number of shares of Common Stock (excluding treasury shares, if any) issued and outstanding.
g) Notice to Holder .
i. Adjustment to Exercise Price . Whenever the Exercise Price is adjusted pursuant to any provision of this Section 3, the Company shall promptly mail to the Holder a notice setting forth the Exercise Price after such adjustment and setting forth a brief statement of the facts requiring such adjustment.
ii. Notice to Allow Exercise by Holder . After the Issue Date, (A) the Company shall declare a dividend (or any other distribution in whatever form) on the Common Stock, (B) the Company shall declare a special nonrecurring cash dividend on or a redemption of the Common Stock, (C) the Company shall authorize the granting to all holders of the Common Stock rights or warrants to subscribe for or purchase any shares of capital stock of any class or of any rights, (D) the approval of any stockholders of the Company shall be required in connection with any reclassification of the Common Stock, any consolidation or merger to which the Company is a party, any sale or transfer of all or substantially all of the assets of the Company, or any compulsory share exchange whereby the Common Stock is converted into other securities, cash or property, or (E) the Company shall authorize the voluntary or involuntary dissolution, liquidation or winding up of the affairs of the Company, then, in each case, the Company shall cause to be mailed to the Holder at its last address as it shall appear upon the Warrant Register of the Company, at least 20 calendar days prior to the applicable record or effective date hereinafter specified, a notice stating (x) the date on which a record is to be taken for the purpose of such dividend, distribution, redemption, rights or warrants, or if a record is not to be taken, the date as of which the holders of the Common Stock of record to be entitled to such dividend, distributions, redemption, rights or warrants are to be determined or (y) the date on which such reclassification, consolidation, merger, sale, transfer or share exchange is expected to become effective or close, and the date as of which it is expected that holders of the Common Stock of record shall be entitled to exchange their shares of the Common Stock for securities, cash or other property deliverable upon such reclassification, consolidation, merger, sale, transfer or share exchange; provided that the failure to mail such notice or any defect therein or in the mailing thereof shall not affect the validity of the corporate action required to be specified in such notice. To the extent that any notice provided hereunder constitutes, or contains, material, non-public information regarding the Company or any of the Subsidiaries, the Company shall simultaneously file such notice with the Commission pursuant to a Current Report on Form 8-K. The Holder shall remain entitled to exercise this Warrant during the period commencing on the date of such notice to the effective date of the event triggering such notice except as may otherwise be expressly set forth herein.
Section 4. Transfer of Warrant .
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a) Transferability . This Warrant may not be transferred, sold, or made subject to a security interest or charge, pledged , hypothecated, or otherwise transferred absent compliance with the transfer restrictions set forth above in this Warrant. Upon such compliance with the transfer restrictions and upon the delivery to the Company at its then executive offices of this Warrant along with a duly completed Assignment Form substantially in the form attached hereto (and the required legal opinion, if any), the Company shall execute and deliver a new Warrant in the form of this Warrant (including the legend set forth above on the first page hereof, unless registered under the Securities Act and any applicable securities laws of the several states of the United States (State Laws)), but registered in the name of the assignee, to purchase the number of Warrant Shares or that fraction of the Warrant Shares issuable under the original Warrant assigned to the assignee. In case the Holder shall assign this Warrant with respect to fewer than all of the Warrant Shares that may be purchased under this Warrant, the Company shall execute a new warrant in the form of this Warrant for the balance of such Warrant Shares or the remaining fraction of the Warrant Shares issuable under the original Warrant and deliver such new warrant to the Holder. Any transfer or sale or attempted transfer or sale of this Warrant in violation of any provision of this Warrant shall be void, and the Company shall not record such transfer on its books or treat any purported transferee of the Warrant as the owner of the Warrant for any purpose.
b) New Warrants . This Warrant may be divided or combined with other Warrants upon presentation hereof at the aforesaid office of the Company, together with a written notice specifying the names and denominations in which new Warrants are to be issued, signed by the Holder or its agent or attorney. Subject to compliance with Section 4(a), as to any transfer which may be involved in such division or combination, the Company shall execute and deliver a new Warrant or Warrants in exchange for the Warrant or Warrants to be divided or combined in accordance with such notice. All Warrants issued on transfers or exchanges shall be dated the initial issuance date set forth on the first page of this Warrant and shall be identical with this Warrant except as to the number of Warrant Shares issuable pursuant thereto.
c) Warrant Register . The Company shall register this Warrant, upon records to be maintained by the Company for that purpose (the Warrant Register ), in the name of the record Holder hereof from time to time. The Company may deem and treat the registered Holder of this Warrant as the absolute owner hereof for the purpose of any exercise hereof or any distribution to the Holder, and for all other purposes, absent actual notice to the contrary. Upon thirty (30) days notice to the Holder, the Company may appoint a warrant agent to maintain the Warrant Register.
d) Representation by the Holder . The Holder represents and covenants to the Company by acceptance of this Warrant, as follows:
i. That the Holder is not a U.S. Person (as defined in Rule 902 of Regulation S promulgated under the Securities Act) and is not acquiring the Warrant for the account or benefit of any U.S. Person.
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ii. The Holder acquired this Warrant from the Company and will acquire Warrant Shares issuable upon exercise hereof, for its own account, for investment purposes only and not with a view to the resale and distribution thereof, in whole or in part.
iii. The Holder shall comply with the transfer restrictions set out above and in the Loan Commitment Letter between the Holder and the Company (the Commitment Letter ) (including, without limitation, Schedule C attached thereto and made a part thereof) and the Holder understands that this Warrant and the Warrant Shares issuable on exercise hereof must be held indefinitely unless subsequently registered under the Securities Act and qualified under any applicable State Laws, or unless exemptions from registration and qualification are otherwise available.
iv. The Holder acknowledges and agrees that hedging transactions involving this Warrant or the Warrant Shares may not be conducted unless conducted in compliance with law.
Section 5. Compliance with Securities Laws . This Warrant and the Warrant Shares have not been registered under the Securities Act, or qualified under State Laws. The Holder is aware that the issuance of this Warrant and the issuance of the Warrant Shares are being made in reliance on Regulation S under the Securities Act. This Warrant and the Warrant Shares have been purchased for investment and not with a view to distribution or resale, and may not be assigned, sold or made subject to a security interest, pledged, hypothecated, or otherwise transferred without an effective registration statement for such Warrant or Warrant Shares under the Securities Act and qualification under State Laws, pursuant to an exemption from registration and qualification, or an opinion of counsel satisfactory to the Company that such registration and qualification are not required. Any Warrant Shares issued upon the exercise of this Warrant (unless pursuant to an effective registration statement under the Act) shall bear the following legend:
THIS SECURITY HAS NOT BEEN AND WILL NOT REREGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE SECURITIES LAWS. THE HOLDER HEREOF, BY PURCHASING THIS SECURITY, AGREES FOR THE BENEFIT OF THE COMPANY THAT THIS SECURITY MAY NOT BE OFFERED, SOLD, PLEDGED, OR OTHERWISE TRANSFERRED BY SUCH HOLDER PRIOR TO THE LATER OF (X) SIX MONTHS FOLLOWING THE ISSUANCE HEREOF OR (Y) IF APPLICABLE, THREE MONTHS AFTER IT CEASES TO BE AN AFFILIATE, OTHER THAN (1) TO THE COMPANY, (2) PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT AND IN ACCORDANCE WITH ANY APPLICABLE LAWS OF ANY STATE OF THE UNITED STATES, (3) IN AN OFFSHORE TRANSACTION COMPLYING WITH REGULATION S UNDER THE SECURITIES ACT, (4) PURSUANT TO AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT PROVIDED BY RULE 144, IF APPLICABLE, UNDER THE SECURITIES ACT OR (5) IN A TRANSACTION THAT DOES NOT REQUIRE REGISTRATION UNDER THE SECURITIES
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ACT BUT IS IN ACCORDANCE WITH APPLICABLE STATE SECURITIES LAWS AND IN RELATION TO WHICH THE HOLDER HAS FURNISHED TO THE COMPANY AN OPINION TO SUCH EFFECT FROM COUNSEL OF RECOGNISED STANDING IN FORM AND SUBSTANCE SATISFACTORY TO THE COMPANY PRIOR TO SUCH OFFER, SALE, PLEDGE OR TRANSFER. THE HOLDER HEREOF, BY PURCHASING THIS SECURITY, REPRESENTS AND AGREES FOR THE BENEFIT OF THE COMPANY THAT IT IS A NON-U.S. PERSON, AND ACKNOWLEDGES THAT HEDGING TRANSACTIONS INVOLVING THESE SECURITIES MAY NOT BE CONDUCTED UNLESS CONDUCTED IN COMPLIANCE WITH THE SECURITIES ACT.
Section 6. Miscellaneous .
a) No Rights as Stockholder Until Exercise . This Warrant does not entitle the Holder to any voting rights, dividends or other rights as a stockholder of the Company prior to the exercise hereof.
b) Loss, Theft, Destruction or Mutilation of Warrant . The Company covenants that upon receipt by the Company of evidence reasonably satisfactory to it of the loss, theft, destruction or mutilation of this Warrant or any stock certificate relating to the Warrant Shares, and in case of loss, theft or destruction, of indemnity or security reasonably satisfactory to it (which, in the case of the Warrant, shall not include the posting of any bond), and upon surrender and cancellation of such Warrant or stock certificate, if mutilated, the Company will make and deliver a new Warrant or stock certificate of like tenor and dated as of such cancellation, in lieu of such Warrant or stock certificate.
c) Saturdays, Sundays, Holidays, etc . If the last or appointed day for the taking of any action or the expiration of any right required or granted herein shall not be a Business Day, then, such action may be taken or such right may be exercised on the next succeeding Business Day.
d) Authorized Shares .
The Company covenants that, during the period the Warrant is outstanding, it will reserve from its authorized and unissued Common Stock a sufficient number of shares to provide for the issuance of the Warrant Shares upon the exercise of any purchase rights under this Warrant. The Company further covenants that its issuance of this Warrant shall constitute full authority to its officers who are charged with the duty of executing stock certificates to execute and issue the necessary certificates for the Warrant Shares upon the exercise of the purchase rights under this Warrant. The Company will take all such reasonable action as may be necessary to assure that such Warrant Shares may be issued as provided herein without violation of any applicable law or regulation, or of any requirements of the Trading Market upon which the Common Stock may be listed. The Company covenants that all Warrant Shares which may be issued upon the exercise of the purchase rights represented by this
14
Warrant will, upon exercise of the purchase rights represented by this Warrant and payment for such Warrant Shares in accordance herewith, be duly authorized, validly issued, fully paid and nonassessable and free from all taxes, liens and charges created by the Company in respect of the issue thereof (other than taxes in respect of any transfer occurring contemporaneously with such issue).
Except and to the extent as waived or consented to by the Holder, the Company shall not by any action, including, without limitation, amending its certificate of incorporation or through any reorganization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms of this Warrant, but will at all times in good faith assist in the carrying out of all such terms and in the taking of all such actions as may be necessary or appropriate to protect the rights of Holder as set forth in this Warrant against impairment. Without limiting the generality of the foregoing, the Company will (i) not increase the par value of any Warrant Shares above the amount payable therefor upon such exercise immediately prior to such increase in par value, (ii) take all such action as may be necessary or appropriate in order that the Company may validly and legally issue fully paid and nonassessable Warrant Shares upon the exercise of this Warrant and (iii) use commercially reasonable efforts to obtain all such authorizations, exemptions or consents from any public regulatory body having jurisdiction thereof, as may be, necessary to enable the Company to perform its obligations under this Warrant.
Before taking any action which would result in an adjustment in the number of Warrant Shares for which this Warrant is exercisable or in the Exercise Price, the Company shall obtain all such authorizations or exemptions thereof, or consents thereto, as may be necessary from any public regulatory body or bodies having jurisdiction thereof.
e) Jurisdiction . All questions concerning the construction, validity, enforcement and interpretation of this Warrant shall be determined in accordance with the laws of the State of Delaware.
f) Restrictions . The Holder acknowledges that the Warrant Shares acquired upon the exercise of this Warrant, if not registered, and the Holder does not utilize cashless exercise, will have restrictions upon resale imposed by state and federal securities laws.
g) Nonwaiver and Expenses . No course of dealing or any delay or failure to exercise any right hereunder on the part of Holder shall operate as a waiver of such right or otherwise prejudice Holder s rights, powers or remedies. Without limiting any other provision of this Warrant, if the Company willfully and knowingly fails to comply with any provision of this Warrant, which results in any material damages to the Holder, the Company shall pay to Holder such amounts as shall be sufficient to cover any costs and expenses including, but not limited to, reasonable attorneys fees, including those of
15
appellate proceedings, incurred by Holder in collecting any amounts due pursuant hereto or in otherwise enforcing any of its rights, powers or remedies hereunder.
h) Notices . The Company shall provide Holder with prompt written notice of all actions taken pursuant to this Warrant. Whenever notice is required to be given under this Warrant, unless otherwise provided herein, such notice shall be given in writing, will be mailed (a) if within the domestic United States by first-class registered or certified airmail, or nationally recognized overnight express courier, postage prepaid, or by facsimile or (b) if delivered from outside the United States, by International Federal Express or facsimile, and (c) will be deemed given (i) if delivered by first-class registered or certified mail domestic, three Business Days after so mailed, (ii) if delivered by nationally recognized overnight carrier, one Business Day after so mailed, (iii) if delivered by International Federal Express, two Business Days after so mailed and (iv) if delivered by facsimile, upon electronic confirmation of receipt, and will be delivered and addressed as follows:
(i) if to the Company, to:
Clean Diesel Technologies, Inc.
1621 Fiske Place
Oxnard, California 93033
Attention: Chief Financial Officer
Facsimile: 805 639 9466
With Copies to:
DLA LLP (US)
2525 E. Camelback Rd, Suite 1000
Phoenix, AZ 85016
Attention: Steven Pidgeon
Facsimile:
(ii) if to the Holder, at the address of the Holder appearing on the books of the Company.
i) Limitation of Liability . No provision hereof, in the absence of any affirmative action by Holder to exercise this Warrant to purchase Warrant Shares, and no enumeration herein of the rights or privileges of Holder, shall give rise to any liability of Holder for the purchase price of any Common Stock or as a stockholder of the Company, whether such liability is asserted by the Company or by creditors of the Company.
j) Remedies . The Holder, in addition to being entitled to exercise all rights granted by law, including recovery of damages, will be entitled to specific performance of its rights under this Warrant. The Company agrees that monetary damages would not be adequate compensation for any loss incurred by reason of a breach by it of the provisions of this Warrant and hereby agrees to waive and not to assert the defense in any action for specific performance that a remedy at law would be adequate.
16
k) Successors and Assigns . Subject to applicable securities laws, this Warrant and the rights and obligations evidenced hereby shall inure to the benefit of and be binding upon the successors and permitted assigns of the Company and the successors and permitted assigns of Holder. The provisions of this Warrant are intended to be for the benefit of any Holder from time to time of this Warrant and shall be enforceable by the Holder or holder of Warrant Shares.
l) Amendment . This Warrant may be modified or amended or the provisions hereof waived with the written consent of the Company and the Holder.
m) Severability . Wherever possible, each provision of this Warrant shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Warrant shall be prohibited by or invalid under applicable law, such provision shall be ineffective to the extent of such prohibition or invalidity, without invalidating the remainder of such provisions or the remaining provisions of this Warrant.
n) Headings . The headings used in this Warrant are for the convenience of reference only and shall not, for any purpose, be deemed a part of this Warrant.
********************
(Signature Page Follows)
17
IN WITNESS WHEREOF, the Company has caused this Warrant to be executed by its officer thereunto duly authorized as of the date first above indicated.
CLEAN DIESEL TECHNOLOGIES INC.
By: | |
Name: David E. Shea | |
Title: Chief Financial Officer |
18
NOTICE OF EXERCISE
To: CLEAN DIESEL TECHNOLOGIES, INC.
(1)
The undersigned hereby elects to purchase Warrant Shares of the Company pursuant to the terms of the attached Warrant (only if exercised in full), and tenders herewith payment of the exercise price in full, together with all applicable transfer taxes, if any.
(2)
Payment shall take the form of in lawful money of the United States; or
(3)
Please issue a certificate or certificates representing said Warrant Shares in the name of the undersigned or in such other name as is specified below:
The Warrant Shares shall be delivered to the following DWAC Account Number or by physical delivery of a certificate to:
[SIGNATURE OF HOLDER]
Name of Investing Entity:
Signature of Authorized Signatory of Investing Entity:
Name of Authorized Signatory:
Title of Authorized Signatory:
Date:
19
ASSIGNMENT FORM
(To assign the foregoing warrant, execute this form and supply required information. Do not use this form to exercise the warrant.)
FOR VALUE RECEIVED, [ ] all of or [ ] shares of the foregoing Warrant and all rights evidenced thereby are hereby assigned to
_____________________________ whose address is
_________________________________________________________
_________________________________________________________ .
Dated: ____, ___
Holder s Signature:
Holder s Address:
Signature Guaranteed:
NOTE: The signature to this Assignment Form must correspond with the name as it appears on the face of the Warrant, without alteration or enlargement or any change whatsoever, and must be guaranteed by a bank or trust company. Officers of corporations and those acting in a fiduciary or other representative capacity should file proper evidence of authority to assign the foregoing Warrant.
20
TRANSFER RESTRICTIONS
The Warrant and Warrant Shares (collectively, the Warrant Securities ) have not been registered under the U.S. Securities Act of 1933, as amended (the Securities Act ), and may not be offered or sold to or for the account or benefit of U.S. Persons (as defined in Rule 902 of Regulation S promulgated under the Securities Act), except pursuant to Regulation S, the registration requirements of the Securities Act or an exemption from the registration requirements of the Securities Act.
Accordingly, the Warrant Securities are being placed outside the U.S. to non-U.S. Persons in an offshore transaction in reliance on Regulation S under the Securities Act. The terms United States and U.S. Person have the respective meanings given to those terms in Regulation S under the Securities Act.
Each holder of Warrant Securities will be deemed to have represented and agreed as follows:
A.
It is acquiring the Warrant Securities for its own account or an account with respect to which it exercises sole investment discretion and that it and any such account or person is not a U.S. Person, and it is aware that the acquisition of Warrant Securities is being made in reliance on Regulation S under the Securities Act.
B.
It acknowledges that the Warrant Securities have not been registered under the Securities Act and may not be offered or sold except as provided below.
C.
It understands and agrees:
1.
that the Warrant Securities are being offered only outside the United States to non-U.S. Persons in an offshore transaction in reliance upon Regulation S under the Securities Act; and
2.
that it shall not offer, sell, pledge or otherwise transfer any Warrant Security within six (6) months after the date of original issuance of such Warrant Security or, in the case of an affiliate (as defined in Rule 144 promulgated under the Securities Act) of the Company, at any time until the later of (i) one (1) year after the date of original issuance of such Warrant Security and (ii) three months after it ceases to be an affiliate of the Company, other than:
(a)
to the Company;
(b)
pursuant to an effective registration statement under the Securities Act and in accordance with any applicable securities laws of any state of the United States;
(c)
in an offshore transaction in accordance with Regulation S under the Securities Act;
(d)
pursuant to an exemption from the registration requirements of the Securities Act; or
21
(e)
in a transaction that does not require registration under the Securities Act but is in accordance with applicable state securities laws and in relation to which the transferor has furnished to the Company an opinion to such effect from counsel of recognized standing in form and substance satisfactory to the Company prior to such offer, sale, pledge or transfer.
D.
It understands that in any resale and transfer of Warrant Securities it will, and each subsequent holder thereof is required to, notify any purchaser of Warrant Securities of the resale restrictions referred to above, if then applicable. This notification requirement will be satisfied by virtue of the fact that the following legend will be placed on the certificates representing the Warrant Shares, unless otherwise agreed to by the Company:
THIS SECURITY HAS NOT BEEN AND WILL NOT REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE SECURITIES LAWS. THE HOLDER HEREOF, BY PURCHASING THIS SECURITY, AGREES FOR THE BENEFIT OF THE COMPANY THAT THIS SECURITY MAY NOT BE OFFERED, SOLD, PLEDGED, OR OTHERWISE TRANSFERRED BY SUCH HOLDER PRIOR TO THE LATER OF THE (X) SIX MONTHS FOLLOWING THE ISSUANCE HEREOF OR (Y) IF APPLICABLE, THREE MONTHS AFTER IT CEASES TO BE AN AFFILIATE, OTHER THAN (1) TO THE COMPANY, (2) PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT AND IN ACCORDANCE WITH ANY APPLICABLE LAWS OF ANY STATE OF THE UNITED STATES, (3) IN AN OFFSHORE TRANSACTION COMPLYING WITH REGULATION S UNDER THE SECURITIES ACT, (4) PURSUANT TO AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT PROVIDED BY RULE 144, IF APPLICABLE, UNDER THE SECURITIES ACT OR (5) IN A TRANSACTION THAT DOES NOT REQUIRE REGISTRATION UNDER THE SECURITIES ACT BUT IS IN ACCORDANCE WITH APPLICABLE STATE SECURITIES LAWS AND IN RELATION TO WHICH THE HOLDER HAS FURNISHED TO THE COMPANY AN OPINION TO SUCH EFFECT FROM COUNSEL OF RECOGNISED STANDING IN FORM AND SUBSTANCE SATISFACTORY TO THE COMPANY PRIOR TO SUCH OFFER, SALE, PLEDGE OR TRANSFER. THE HOLDER HEREOF, BY PURCHASING THIS SECURITY, REPRESENTS AND AGREES FOR THE BENEFIT OF THE COMPANY THAT IT IS A NON-U.S. PERSON, AND ACKNOWLEDGES THAT HEDGING TRANSACTIONS INVOLVING THESE SECURITIES MAY NOT BE CONDUCTED UNLESS CONDUCTED IN COMPLIANCE WITH THE SECURITIES ACT.
E.
It acknowledges that the foregoing restrictions apply to holders of beneficial interests in the Warrant Securities as well as to holders of Warrant Securities.
F.
It acknowledges that it shall not engage in any hedging transactions involving the Warrant Securities unless in compliance with the Securities Act.
22
G. It is a Qualified Investor within the meaning of Section 86 of the Financial Services and Markets Act 2000 and an investment professional within the meaning of Article 19 of the FSMA 2000 (Financial Promotion) Order 2005.
23
EXHBIT 10.44
TKK-CDTi Addendum Agreement
This Addendum is hereby made and entered into this 13 day of March, 2015, by and between:
Tanaka Holdings Co., Ltd (formerly Tanaka Holdings Kabushiki Kaisha (K.K.)) and Tanaka Kikinzoku Kogyo K. K. (collectively, TKK ),
and
TC Catalyst, Inc. ( TCC )
and
Catalytic Solutions, Inc. (together with its affiliates, CDTi )
Reference is made to the parties Purchase and Sale Agreement dated December 22, 2008, as amended (the First Purchase and Sale Agreement ), Second Purchase and Sale Agreement dated December 18, 2009 (the Second Purchase and Sale Agreement ) and New Shareholders Agreement (the New Shareholders Agreement ) dated December 18, 2009 (collectively, the Agreements ).
WHEREAS, the parties have a long-standing relationship surrounding emission control catalysts for vehicles, including, for example, two- and four-wheeled vehicles, automobiles, vans, mini-vans, sport utility vehicles, buses, trucks, delivery vans and marine vehicles;
WHEREAS, the parties intend to continue technical and commercial collaboration in an effort to take advantage of commercial opportunities in Asian countries listed in the Agreements, and;
WHEREAS, the parties have consequently agreed to explore constructive ways to work together in relation to said countries:
NOW, THEREFORE, the parties agree to amend the Agreements as follows to clarify the business opportunities that TKK and TCC will allow CDTi to pursue related to the existing Agreements (as amended by and subject to the terms and conditions of this Addendum).
CDTi can sell, market or otherwise commercialize any technology and products in the Territory, subject to the following terms and conditions and the terms and conditions of the Agreements to the extent they are not amended by this Addendum:
Definitions:
1. The definition of Territory for purposes of the Agreements is supplemented and amended with the following:
With respect to products used in vehicles, the product shall be deemed to be sold in the Territory only if the ultimate user of the vehicle which contains the product purchases the vehicle in the Territory. Sales of such products deemed to be sold outside of the Territory under this principle shall be permitted without royalty.
2. The following definitions are added:
Coated Substrate shall mean a product comprised of a Raw Substrate, platinum group metals (PGM), and a coating developed and applied by or for and on behalf of CDTi.
Coating Fee shall mean the fee CDTi charges customers for the coating portion of a Coated Substrate.
Intermediate Materials shall mean enabling catalytic materials in powder or liquid form as established by CDTi.
New Technology shall mean technology developed by CDTi after it sold to TKK the Prior Technology which, for the avoidance of doubt, shall include any technology developed by CDTi after the relevant Development Period specified in the applicable Agreement and shall exclude any Prior Technology.
Prior Technology shall mean HDU Technology (as defined in the First Purchase and Sale Agreement) and Purchased Technology (as defined in the Second Purchase and Sale Agreement), including any improvements thereof that CDTi sold to TKK pursuant to the Agreements and subject to the relevant Development Period specified in the applicable Agreement.
Raw Substrate shall mean an uncoated substrate purchased by CDTi.
Samples shall mean limited quantities of Coated Substrates or proprietary Intermediate Materials sold for the purpose of customer testing, evaluation, and approval.
Service Parts means limited quantities of Coated Substrates sold during an extended time period after mass production ends for a specific vehicle model year program, as notified in writing by CDTi to TKK.
3. Royalty.
a)
CDTi shall pay a royalty to TKK, which shall be equal to 4.0%, for the following sales inside the Territory (i) Coated Substrates utilizing Prior Technology and (ii) Coated Substrates or CDTi revenue from sales of proprietary Intermediate Materials (such revenue amounts shall be determined by excluding PGM, if any) that utilize both New Technology and Prior Technology. With respect to Coated Substrates, the royalty amount shall be calculated solely based upon the Coating Fee portion of such Coated Substrates. Payment shall be made quarterly in USD. All amounts payable under this Addendum are payable within 30 days of the end of each calendar quarter. If CDTi fails to pay any sum on the due date for payment, TKK may charge interest at the rate of 14 per cent per annum on the sum from the due date for payment until the date on which the obligation of CDTi to pay the sum is discharged.
b)
The Parties agree that CDTi may commercialize New Technology by selling Coated Substrates, by selling CDTi proprietary Intermediate Materials, or by licensing the New Technology to third parties, provided, however, that CDTi shall pay a royalty to TKK on Coated Substrates or CDTi proprietary Intermediate Materials sold inside the Territory utilizing New Technology, which shall be equal to
3.0% of the Coating Fee, 3.0% of all CDTi revenue from sales of proprietary Intermediate Materials (such revenue amounts shall be determined by excluding PGM, if any), or 3.0% of any licensing fee revenue CDTi receives from third parties within the Territory for New Technology related to catalysts for HDU or LVA (as defined in the New Shareholders Agreement) including, but not limited to, one-time or ongoing royalty revenue received by CDTi for the transfer, licensing or sales of such New Technology related to catalysts for HDU or LVA (as defined in the New Shareholders Agreement) to any parties within the Territory. The royalty amount on New Technology shall be calculated on the Coating Fee portion of the Coated Substrates, on revenue from sales of CDTi proprietary Intermediate Materials or on license fee revenue CDTi receives, as applicable, in each case as described above. Payment shall be made quarterly in USD. All amounts payable under this Addendum are payable within 30 days of the end of each calendar quarter. If CDTi fails to pay any sum on the due date for payment, TKK may charge interest at the rate of 14 per cent per annum on the sum from the due date for payment until the date on which the obligation of CDTi to pay the sum is discharged.
c)
Except as required by law, all payments by CDTi under this Addendum shall be made free of, and without any deduction or withholding for or on account of, any present and future taxes, levies, deductions or withholdings ( Taxes ) imposed, assessed, levied or collected by any country or taxing authority thereof or therein. Whenever any Taxes are paid or withheld by CDTi, as promptly as possible thereafter, CDTi shall send TKK a certified copy of any official receipt received by CDTi showing payment thereof and/or the appropriate Tax deduction certificate. CDTi will render all reasonable assistance to TKK to enable TKK to recover withheld Taxes from the relevant tax authority or get the benefit of the relevant Tax credit.
d)
Samples and Service Parts shall not be subject to any royalty.
e)
The maximum aggregate amount on all royalties paid by CDTi to TKK hereunder shall be US $16,603,148.
f)
After this maximum amount has been reached, CDTi shall be allowed to commercialize any technology, including Prior Technology or New Technology, within or outside the Territory without royalty.
g)
CDTi shall retain customer verification letters or other records mutually acceptable to both CDTi and TKK of sales subject to the royalty and, upon request, provide such records to TKK attached to a cover sheet mutually acceptable to both CDTi and TKK which contains information pertaining to applicable customers, volumes, revenue portions and types, and royalty percentages. TKK shall also have the right to inspect such records on a monthly or other basis mutually acceptable to CDTi and TKK.
h)
CDTi shall keep complete and accurate books and records of all manufacturing and sales in sufficient detail to permit an independent certified public accountant or accounting firm engaged by TKK, subject to CDTi s approval which will not unreasonably be withheld (the Independent Auditor ), to confirm the accuracy of CDTi s royalty payment calculations. Should TKK and CDTi fail to agree on the Independent Auditor, the parties agree to submit the matter to an expert appointed by the International Centre for Expertise in accordance with the provisions for the appointment of experts under the Rules for Expertise of the International Chamber of Commerce.
For the avoidance of doubt, such Independent Auditor shall have no material interests in either of the parties or any of their respective affiliate companies. CDTi shall provide all necessary information and documents to the Independent Auditor in relation to the manufacture and sale of products at the reasonable request of the Independent Auditor, including, but not limited to, arrangements to confirm with CDTi s client company, to the extent CDTi has access to such information and CDTi would not breach any confidentiality arrangements with its clients by disclosing that information or documentation to a third party. Prior to receiving such information and documents, the Independent Auditor shall enter into a confidentiality agreement with CDTi in form and substance acceptable to CDTi. The Independent Auditor will be engaged at TKK s cost to examine such records. If the audit report indicates that CDTi s report is incorrect and the shortfall in the royalty payment in respect of any individual report exceeds five percent (5%) of the correct amount of the royalty payment, CDTi shall bear the cost of the Independent Auditor notwithstanding the above.
4.
CDTi shall not be deemed to transfer, sell, or assign any rights, title or interests in or to the New Technology by reason of the royalty payments described herein.
5.
The parties agree that information and materials made available to one another pursuant to this Addendum shall be considered Confidential Information (as defined in the New Shareholders Agreement), subject to the provisions of the New Shareholders Agreement, and shall not use such Confidential Information in any manner not specifically permitted under this Addendum.
[Signature Page Follows]
If you are in agreement with the above terms, please indicate your acceptance of the foregoing by signing in the space provided below. Thank you.
Sincerely,
CATALYTIC SOLUTIONS, INC.
By: /s/ Christopher Harris
Christopher Harris,
Chief Executive Officer
ACCEPTED AND AGREED:
TANAKA HOLDINGS CO., LTD.
By: /s/ Koichiro Tanaka
Koichiro Tanaka,
Executive Senior Managing Director
TANAKA KIKINZOKU KOGYO K. K.
By: /s/ Koichiro Tanaka
Koichiro Tanaka,
Executive Senior Managing Director
TC CATALYST, INC.
By: /s/ Satoshi Ichiishi
Satoshi Ichiishi,
Representative Director and President
Exhibit 21
SUBSIDIARIES OF REGISTRANT
Clean Diesel Technologies, Inc.'s subsidiaries as of December 31, 2014 are listed below.
Name of Subsidiary |
|
State/Jurisdiction of Incorporation |
|
Common Equity Ownership |
|
|
|
|
|
Clean Diesel Technologies Limited |
|
United Kingdom |
|
100% |
Catalytic Solutions, Inc. |
|
California |
|
100% |
CSI Aliso, Inc. |
|
California |
|
100% |
Catalytic Solutions Holdings, Inc. |
|
Delaware |
|
100% |
ECS Holdings, Inc. |
|
Delaware |
|
100% |
Engine Control Systems Ltd. |
|
Nevada |
|
100% |
Engine Control Systems Limited |
|
New Brunswick |
|
100% |
CDTI Sweden AB |
|
Sweden |
|
100% |
Exhibit 23
Consent of Independent Registered Public Accounting Firm
Clean Diesel Technologies, Inc.
Oxnard, California
We hereby consent to the incorporation by reference in the Registration Statements on Form S-3 (Nos. 333-181443 and 333-183204) and Form S-8 (Nos. 333-182009, 333-151777, 333-117057, 333-16939, and 333-33276) of Clean Diesel Technologies, Inc. of our report dated March 17, 2015, relating to the consolidated financial statements of Clean Diesel Technologies, Inc., which appears in this Form 10-K. Our report contains an explanatory paragraph regarding the Company s ability to continue as a going concern.
/s/ BDO USA, LLP
BDO USA, LLP
Los Angeles, California
March 18, 2015
Exhibit 31.1
Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, Christopher J. Harris, certify that:
1. I have reviewed this Annual Report on Form 10-K (the report ) of Clean Diesel Technologies, Inc. (the registrant );
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15 (e) and 15d-15 (e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15 (f) and 15d-15 (f)) for the registrant and have:
|
a) |
designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
|
b) |
designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
|
c) |
evaluated the effectiveness of the registrant s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
|
d) |
disclosed in this report any change in the registrant s internal control over financial reporting that occurred during the registrant s fourth fiscal quarter of 2014 that has materially affected, or is reasonably likely to materially affect, the registrant s internal control over financial reporting; and |
5. The registrant s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant s auditors and the audit committee of the registrant s board of directors (or persons performing the equivalent functions):
|
a) |
all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting, which are reasonably likely to adversely affect the registrant s ability to record, process, summarize and report financial information; and |
|
b) |
any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant s internal control over financial reporting. |
Date: March 18, 2015 |
By: |
/s/ Christopher J. Harris |
|
|
Christopher J. Harris |
|
|
President and Chief Executive Officer (Principal Executive Officer) |
Exhibit 31.2
Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, David E. Shea, certify that:
1. I have reviewed this Annual Report on Form 10-K (the report ) of Clean Diesel Technologies, Inc. (the registrant );
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15 (e) and 15d-15 (e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15 (f) and 15d-15 (f)) for the registrant and have:
|
a) |
designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
|
b) |
designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
|
c) |
evaluated the effectiveness of the registrant s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
|
d) |
disclosed in this report any change in the registrant s internal control over financial reporting that occurred during the registrant s fourth fiscal quarter of 2014 that has materially affected, or is reasonably likely to materially affect, the registrant s internal control over financial reporting; and |
5. The registrant s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant s auditors and the audit committee of the registrant s board of directors (or persons performing the equivalent functions):
|
a) |
all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting, which are reasonably likely to adversely affect the registrant s ability to record, process, summarize and report financial information; and |
|
b) |
any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant s internal control over financial reporting. |
Date: March 18, 2015 |
By: |
/s/ David E. Shea |
|
|
David E. Shea |
|
|
Chief Financial Officer (Principal Financial and Accounting Officer) |
Exhibit 32
Certifications Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002,
18 U.S.C. Section 1350
Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, the undersigned, in their capacities as officers of Clean Diesel Technologies, Inc. (the Registrant ), do each hereby certify, that, to the best of such officer s knowledge:
(1) The Annual Report on Form 10-K of the Registrant for the period ended December 31, 2014 (the Report ) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of Registrant.
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/s/ Christopher J. Harris |
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Christopher J. Harris |
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President and Chief Executive Officer |
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(Principal Executive Officer) |
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March 18, 2015 |
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/s/ David E. Shea |
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David E. Shea |
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Chief Financial Officer |
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(Principal Financial and Accounting Officer) |
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March 18, 2015 |
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The foregoing certification is being furnished solely pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, and is not being filed as part of the Form 10-K or as a separate disclosure document for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the Exchange Act ), or otherwise subject to liability under that section. This certification shall not be deemed to be incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Exchange Act except to the extent that this Exhibit 32 is expressly and specifically incorporated by reference in any such filing.
A signed original of this written statement required by Section 906 has been provided to the Registrant and will be retained by the Registrant and furnished to the Securities and Exchange Commission or its staff upon request.